Last Updated on 11 September, 2023 by Samuelsson
Live Cattle Futures trading is an increasingly popular way for investors to gain exposure to the livestock market. By trading live cattle futures contracts, investors can benefit from price movements in the livestock market without needing to purchase and store physical cattle. This article will explore the basics of live cattle futures trading, the potential benefits and risks of trading live cattle futures, and the strategies investors use to trade these contracts.
Live cattle are cattle that have grown to the requisite weight for slaughter. Cattle are considered to be suitable for slaughter when they reach a weight of about 1100 to 1400 pounds, and this normally takes about six to ten months. Live cattle futures contracts are widely traded on the commodity exchanges in the US and Brazil.
Live cattle futures markets are futures contracts that track the price of live cattle. It trades on the CME, and is one of the best ways for traders and hedgers to access the live cattle market.
Trading in live cattle futures started on the Chicago Mercantile Exchange (CME) in 1964 and has been an important part of the trillion-dollar global beef market, which has created millions of jobs in supply, distribution, and retailing. Apart from the economic impact, live cattle are an important commodity because they are a major food source — the beef and other beef-related products we consume come from live cattle.
Live Cattle Trading Strategies
The live cattle futures market may not be the most traded futures contract, but it certainly is possible to build trading strategies that trade the market successfully. And if you are lucky to find something like the trading strategy above, then it will blend nicely with your other trading strategies and help with reducing the risk of the portfolio!
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Live Cattle trading strategies are based on the analysis of the underlying market trends and the current supply and demand for the commodity. Live Cattle prices are influenced by a variety of factors such as weather, crop production, demand for beef, exports, and imports. Traders can use technical analysis to identify the underlying market trends, which can then be used to develop trading strategies. Some of the most common trading strategies for Live Cattle include:
1. Trend Trading: This strategy involves identifying the underlying market trends and then following them to try and capitalize on any potential price movements. For example, if the prices of Live Cattle are increasing, traders may attempt to buy the commodity when it reaches a certain level and then sell it when the price reaches a higher level.
2. Scalping: This strategy involves taking advantage of small price fluctuations in the market. Traders will attempt to buy a certain amount of the commodity and then sell it shortly after for a profit. This strategy is typically used when the market is experiencing high volatility or when the price of the commodity is expected to increase or decrease in the near future.
3. Range Trading: This strategy involves attempting to buy and sell the commodity within a certain range of prices. This allows traders to take advantage of any potential price movements within the specified range.
4. Contrarian Trading: This strategy involves going against the current market trend and attempting to buy the commodity when it is trading at a low price and sell it when it is trading at a high price. This strategy can be used to capitalize on any potential price movements in the opposite direction of the current market trend.
What is Live Cattle Futures trading
Live Cattle Futures trading is a futures contract that is based on the price of live cattle in the market. It is a derivative contract based on the underlying spot price of live cattle and is used by traders to speculate on the future of the live cattle market. The futures contract allows traders to buy or sell a certain number of live cattle at a predetermined price at a specific point in time in the future. The price of the futures contract is determined by supply and demand in the market for live cattle.
Some incredible statistics aboutLive Cattle Futures
Did you know:
1. Live Cattle Futures are traded more than 30 million times every year, making it one of the most actively traded agricultural commodities.
2. Average daily volume for Live Cattle Futures was over 40,000 contracts in 2020.
3. Live Cattle Futures are traded on the Chicago Mercantile Exchange (CME).
4. The CME Live Cattle Futures contract is based on the delivery of 40,000 pounds of live cattle.
5. Live Cattle Futures are traded in increments of $0.0005 per pound.
6. Live Cattle Futures are the most actively traded livestock futures contract, accounting for over 90% of all livestock futures traded in the US.
7. The Live Cattle Futures contract is the most liquid of all livestock futures.
8. The Live Cattle Futures contract has a minimum price fluctuation of $0.0005 per pound.
9. The CME Live Cattle Futures contract has a ticker symbol of LC.
10. The CME Live Cattle Futures contract is for delivery of 40,000 pounds of live cattle.
11. The Live Cattle Futures contract is deliverable at the CME in Chicago.
12. The Live Cattle Futures contract trades from 8:30 a.m. to 1:15 p.m. Central Time (CT).
13. The Live Cattle Futures contract is settled in U.S. dollars and cents per pound.
14. The Live Cattle Futures contract is the most actively traded livestock futures contract on the CME.
15. The Live Cattle Futures contract is used to hedge against price movements in the cash market.
16. The Live Cattle Futures contract is used to speculate on the direction of the Live Cattle market.
17. The Live Cattle Futures contract has a tick size of $0.0005 per pound.
18. The Live Cattle Futures contract has a daily price limit of $0.03 per pound.
19. The Live Cattle Futures contract is traded in U.S. dollars and cents per pound.
20. The Live Cattle Futures contract has a minimum trading margin of $1,500 per contract.
Uses of Live Cattle
There are many uses for live cattle apart from beef production, which is why the futures contract is heavily traded on the commodity exchanges. Here are some of the uses of live cattle:
Beef production: Cattle are raised to mainly produce beef, which is a major source of protein in our diets.
Edible by-products of beef production: There are many edible by-products of beef production, such as liver, kidney, brain, tongue, and tripe. In addition, the gelatin from the bone and skin are used in making marshmallows and ice cream, while the oleo oil and oleo stearin are used to make margarine and candies respectively.
Diary: Milk, yogurt, cheese, and other dairy products are produced from certain breeds of cattle, such as the Holstein-Friesian.
Hides: These can be used to make leather products, brushes, footballs, binders for plaster, certain textiles, and base for insulation material.
Beef fats: The fats in beef can be used to make soaps, detergents, skin creams, lubricants, and pesticides.
Bones and hones: The bones, hooves, and horns of cattle can be processed and used to make things, like piano keys, fertilizers, glues, and buttons.
Live Cattle Trading Strategies backtest
The best way to backtest a live cattle trading strategy is to use a trading simulator. A trading simulator allows you to simulate a trading environment which allows you to test a trading strategy without risking real money. This allows you to test the strategy over a long period of time and to analyze the results. Additionally, you can use the simulator to adjust the parameters of the strategy and to see how the strategy performs in different market conditions. This is a great way to backtest your live cattle trading strategy and to optimize it for the best possible results.
The Largest Producers and Consumers of Live Cattle
Cattle are raised in almost all parts of the world, and they are primarily reared for meat production. According to the United States Department of Agriculture (USDA), the largest producers of beef and veal meat include the United States, Brazil, the European Union, China, India, Argentina, Mexico, Pakistan, Turkey, and Russia.
In terms of beef and veal meat consumption, the US tops the list, and it is followed by China, Brazil, and the EU-27. Other large consumers of beef are India, Argentina, Mexico, Russia, Pakistan, Turkey, Japan, South Africa, and Canada.
Trades in live cattle are usually done through futures contracts.
Why Trade Live Cattle Futures Contracts?
There are many reasons to trade agricultural futures contracts, especially the live cattle futures, and these are some of them:
Increasing demand: As the global economy grows, meat consumption is likely to increase. This is especially true for the emerging market countries in Asia, Latin America, and Africa due to their increasing population. Two of the emerging economies, China and Brazil, are among the top three beef-consuming nations in the world. If the economy of these countries continues to grow, the demand for beef is likely to rise, making live cattle trading more attractive.
Diversifying your portfolio: Live cattle trading offers a great opportunity to diversify a portion of your stock or bond investments to commodities. Diversification helps you spread your risk exposure across many asset classes so as to minimize the effects of systemic risk.
Hedging against inflation: With the way central banks lower interest rates and print more money, the purchasing power of fiat money often diminishes due to rising inflation. Just like most commodities, live cattle are inherently valuable, and it appreciates in value when inflation rises.
How to Play the Live Cattle Futures Market
Although there are other ways to play the live cattle market, such as live cattle options on futures, live cattle ETFs, and live cattle CFDs, live cattle futures contracts offer the best method of trading the market. The futures contract is offered on the Chicago Mercantile Exchange (CME) and can be traded from any part of the world via the CME Globex electronic trading platform.
A live cattle futures contract is equivalent to 40,000 pounds or 18 metric tons of live cattle, and the listed expiration months are February, April, June, August, October, and December. At expiration, the contract is settled by physical delivery. To prevent taking or making a delivery of the commodity, a trader can roll over to the next expiration month.
In addition to the CME and its electronic platform, live cattle futures trade on the Brazilian Mercantile and Futures Exchange (BMF). Futures contracts are leveraged instruments, which can help you maximize profits if you know what you are doing, and you only need to deposit the initial margin to carry a full contract.
Factors Affecting Live Cattle Prices
There are a lot of factors that affect the price of live cattle futures contracts, and these are some of them:
The demand for beef: Since live cattle are grown primarily for beef production, it makes sense that the demand for beef will affect live cattle prices. When there is a higher demand for beef, live cattle prices increase and when beef demand is low, live cattle prices decline.
USDA’s Cattle on Feed Report: This is a monthly report that outlines the number of cattle and calves on feed, the number of cattle in feedlots, and the number shipped out of feedlots to be slaughtered.
The price of feed: Feed prices are inversely related to live cattle prices. When feed prices are high, ranchers push their cattle to the market prematurely, creating surplus supply and a decline in live cattle prices.
Cattle Feeding Spreads: Live cattle traders often trade the correlation between live cattle prices, feeder cattle prices, and corns (feed) prices. An example of these spreads is the cattle crush, where the trader expects a positive correlation between live cattle and feeder cattle prices.
Live Cattle Futures Seasonality
Live cattle futures have a seasonal pattern, with prices typically peaking in the spring and bottoming out in the fall. This is due to the fact that cattle are typically bred in the spring and sent to market in the fall, thereby increasing the supply of cattle and driving prices lower. The spring peak is also driven by increased demand for beef in the months leading up to the grilling season. Additionally, the summer months tend to be a period of consolidation as demand stabilizes and supply adjusts to the seasonal cycle.
Live Cattle Futures typically experience seasonal price movements throughout the year. Prices tend to be lowest in the late winter and early spring, as supplies increase and demand is seasonally weaker. Prices tend to rise into the summer months as supplies begin to dwindle and demand increases. Prices typically reach their peak in the late summer and early fall months. In late fall, prices typically begin to decline again, as supplies increase and demand begins to taper off. Given the seasonal nature of Live Cattle Futures, traders may want to pay special attention to the market in late winter and spring, when prices tend to be at their lowest, as well as in the late summer and early fall, when prices tend to be at their peak. Additionally, traders should take into account current market conditions and any potential supply or demand disruptions which could affect prices.
How to trade live cattle futures
1. Choose a commodity broker: To trade live cattle futures, you will need to open an account with a commodity broker. Make sure to do your research and select a broker that is reputable and has a good track record.
2. Decide on a trading strategy: When trading live cattle futures, you should decide on what type of trading strategy you would like to use. You could choose to go long (buy) or short (sell) and determine the entry and exit points.
3. Monitor the market: To make informed decisions about when to enter and exit trades, it is important that you monitor the market and pay attention to any news or factors that may affect the price of live cattle futures.
4. Place an order: Once you have decided on your entry and exit points, you will need to place an order with your broker. Make sure that you understand the fees associated with each order before you place it.
5. Monitor your positions: Once you have placed your order, you should monitor your positions to ensure that you are making the most of your trades.
6. Set a stop-loss order: You should also set a stop-loss order to limit your risk. This will help prevent you from losing more than you can afford.
7. Take profit when applicable: Once your positions are in the green, you should consider taking profits to make sure that you are maximizing your potential gains.
8. Manage your risk: Risk management is key when trading live cattle futures. Make sure that you are aware of the potential risks and that you are comfortable with the amount of risk you are taking on.
Although live cattle are used for beef production, there are other useful by-products that are gotten from them. Trading live cattle futures contracts is the best way to play the live cattle market. The contracts can be traded on the CME and its electronic trading platform, as well as on the Brazilian Mercantile and Futures Exchange (BMF).
Here is our archive with articles about other tradeable futures markets.