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Feeder Cattle Futures: Production

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.

Disclosure of Risk: The risk of loss in trading futures and options can be substantial; therefore, only genuine risk funds should be used. Futures and options ARE not suitable investments for all individuals, and individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option would result in a futures position.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MOST CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED IN THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING, FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST, OR WILL IN THE FUTURE, ACHIEVE PROFITS USING THESE RECOMMENDATIONS. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.