Commodity Trading: Live
Cattle Futures
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Supply
/ Production Considerations
Cattle
production begins with the cow/calf operator.
These traditional ranchers are in the business of breeding cows and
producing calves (or baby cattle). Cows
are typically bred in the late summer or early fall to time birthing with
the onset of spring, since Cattle require range to graze and the pasture
conditions can support larger herd sizes more easily.
Because Cattle production tends to be centered in states with harsh
winters, like Texas, Kansas, Nebraska, Colorado, Oklahoma, Iowa, South
Dakota, Minnesota and Montana, spring birthing is important since the
weather is more hospitable to the calves.
Roughly
one to three months after a calf is born, the male calves are castrated,
producing a steer. Calves are
typically weaned from their mothers at 6 to 10 months of age, when they
weigh between 300 to 600 pounds. Commercial
cow/calf operators then usually sell the weaned calf to a stocker
operation, which grazes the animals until they reach "Feeder”
weight of 600 to 800 pounds. Cattle
weighing between 600 and 800 pounds are referred to as Feeder Cattle because they
are ready to go into a feed lot.
The
feedlot is in the business of putting weight on Cattle.
Feedlots buy feeder-weight Cattle and through a combination of
"hot" and "cold" feeds they bring them to slaughter
weight of 900 to 1,400 pounds over the coarse of the next three to six
months. "Cold” feed is
an industry term meaning the Cattle are grazed, while "hot feed"
is typically corn, meal or mash fed to Cattle.
Most feedlots prefer to split the time on hot and cold feeds, as
cold feed is more cost effective, but hot feed produces a better animal
and more choice meat cuts.
Cattle
Production Process
| Cow/Calf
Operation
– calves are birthed, then raised till weaned.
This stage typically takes 6 to 10 months. |
|
|
| Stocker
Operation-
cattle graze to "Feeder” weight of 600 to 800 pounds.
This stage typically takes 2 to 4 months.
At the end of this stage, Cattle are referred to as Feeder
Cattle. |
|
|
| Feedlot-
finishes cattle to slaughter weight of 900 to 1,400 pounds. This stage typically takes between 110 and 250 days.
Finished cattle of slaughter weight are referred to as Live Cattle. |
|
|
| Packer/Processor-
Harvest finished slaughter weight cattle into boxed beef. |
|
|
| Purveyor-
Fabricates boxed beef into the retail cuts of beef we all enjoy. |
|
|
| Retailer-
Buys retail cuts of beef and sells them to the consumer. |
So,
roughly between a year and a year and a half after birth, the typical calf
has been brought up to market weight and is ready for slaughter.
In recent times, with consumer's tastes leaning more towards leaner
cuts of beef, larger weight animals are being produced, so production time
has been longer. Since each
stage of the production cycle is dependent upon the previous and next
stage for supply and demand, any disruptions in supply or changes in
demand have great effects upon the whole cattle production cycle.
For example, when grain prices are high, hot feed costs are high
and feedlots have to either increase the price of the finished product or
decrease production, since profits are falling.
If the market will not support higher prices, then a lack of demand
for Feeder Cattle tends to cause stocker operations to slow down, which
causes cow/calf operators to breed less, thus decreasing the future supply
of Cattle. This cycle, known
as the Cattle Cycle tends to run in phases of herd liquidation and herd
building.
Herd
liquidation occurs during unprofitable times.
During these times, cow/calf operators tend to sell off breeding
stock, which increases the number of Cattle in feedlots and further
depresses prices until the number of Cattle retained for breeding purposes
(mature Bulls and Cows) dwindles and the calf numbers drop precipitously.
When this occurs, the supply of beef available tends to rise, which
encourages more breeding. More
calves are retained to rebuild breeding herds and the available supply
becomes even tighter. Eventually
breeding herds are rebuilt and calf crops are large, which tends to cause
an excess supply of beef and lowers prices.
Then the whole process begins again.
Since 1934, we have had six major herd expansions and contractions.
Currently the Cattle industry is in its second year of herd
contraction. On average, the
typical expansion phase lasts roughly six or seven years, while
contraction lasts 2 to 3 years.
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