Commodity Trading:
Feeder Cattle Futures
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Supply / Production
Considerations
The
birth and maturity cycles of cattle are the major issues that have to be
considered when trading cattle futures.
A heifer, or female, is usually not ready for breeding until she is
14 to 18 months old. The
gestation period for cattle is nine months.
Roughly six to eight months after the calf is born, it is weaned
from its mother. For the next
6 to 10 months the cattle is allowed to mature.
During this maturing cycle, they are allowed to forage and graze.
After
the cattle have matured sufficiently, the steers and heifers are sold to
feedlots. During periods of
herd expansion, the heifers are usually retained more frequently to
increase the available breeding stock.
Once the cattle are approximately 600 to 800 pounds, they are
considered Feeder Cattle, or lean cows.
The feedlots are in the business of fattening the feeders up to a
market weight of 1,050 to 1,200 pounds.
Feedlots usually feed the cattle on mainly corn, meals and other
grain products. The price of
grain is the major component in the cost of feeding cattle, so the price
of grain directly affects the demand for Feeder Cattle and the future
supply of beef, or Live Cattle.
Cattle
production generally follows a cyclical change every 12 years.
This 12-year cycle is known as the Cattle Cycle.
Roughly seven of the twelve years are herd expansions, and five of
the twelve years are herd reduction.
Changes in herd sizes are fairly gradual due to the gestation and
feeding operations in place. Feedlot
operators are much more flexible in their operations, so Feeder Cattle
prices tend to be more volatile than Live Cattle prices.
The expansion phase of cattle herds generally coincides with
increasing beef prices and an optimistic future price outlook.
During expansion, heifers are held back to repopulate the herd, so
supply is restricted, generally strengthening prices.
But, after the herds are repopulated and grazing land becomes
overburdened, ranchers are forced to liquidate herds.
As more supply is brought to the market, prices tend to weaken,
encouraging more inventory liquidation.
This process feeds upon itself until only minimal cattle are left
and prices increase to ration the available supply.
There have been about seven cattle cycles since 1896.
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