Feeder Cattle Trading

Feeder cattle are those steers or heifers that are mature enough (600-800 pounds) to be placed into a feedlot, where they can be fattened prior to slaughter. These feeder cattle may be “backgrounded” or “green,” but feedlots from individual operations to large-scale commercial operations are constantly seeking this flow of “raw material” to replace the live cattle that have been moved from the feedlots to slaughter.

A large portion of feeder cattle investors are involved in the industry and trade feeder cattle futures to protect themselves from price fluctuations. Individuals exploring the possibility of investing in feeder cattle should first spend a significant amount of effort gathering information about the market. The beef business is quite involved and has evolved as technology increasingly enters into the cattle pipeline. New investors should not expect to be able to find one book to answer all their questions about beef production and the nuances of trading.

Feeder cattle futures are traded at CME Group along with the live cattle and lean hog futures contracts. While live cattle futures are based on physical delivery of animals to designated points in the United States, feeder cattle futures are cash-settled, based on the CME's feeder cattle index, a seven-day weighted average of United States Department of Agriculture (USDA) prices from a 12-state Midwest region. Medium #1 and Large #1 feeder steers weighing between 700 and 849 pounds are included in the calculation, except for those identified as fancy, thin, fleshy, gaunt, or full.

A feeder cattle futures contract is 50,000 pounds. One point in the feeder cattle trading arena $0.0001 per pound or $5.00, but the minimum tick size is $0.00025 per pound or $12.50. Contract months are January, March, April, May, August, September, October and November.

Breeding in the cattle herd typically takes place in late spring or early summer, producing a calf crop in the following spring after a 10-month gestation period. It will take more than a year for a calf to move through the weaning and early growth period to reach the feeder cattle stage (650-850 pounds). Depending on the backgrounding process used, most numbers of feeder cattle typically are ready to move into the feedlot in late summer or fall at a time when larger feed grain supplies are becoming available from harvest and prices are at seasonal lows.

Feeder Cattle News

Most states have weekly feeder cattle auction summaries that can be useful, especially if from key states where feeder cattle are a major market. Many feeder cattle futures traders and others in the industry use auction data to evaluate pricing and trends for the feeder cattle contract.

Basically, any USDA report that deals with live cattle or meat markets can also be helpful to feeder cattle futures trader. Of particular importance to feeder cattle futures traders is the published feeder cattle index, which is a seven-day weighted average of USDA prices from a 12-state region: Colorado, Iowa, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming. The index assigns the same importance to the index value for every pound of feeder steer sold during the previous seven calendar days, regardless of when or where it was sold. The prices encompass the physical auctions, video and Internet sales as well as direct trades. USDA feeder cattle index calculations can be obtained by accessing the USDA website.

Understanding trends in this industry is the biggest determinant of success for feeder cattle futures traders. Due to the possibility of hot, dry weather in a substantial portion of beef cow country, cattle producers have moved cattle to feedlots at a younger age and lighter weights. This has influenced the methods of feeder cattle trading and the size of positions taken.

The feeder cattle trading arena may be best suited for those with a working knowledge of the beef industry or those involved in managing their own feeder cattle stock. Trading feeder cattle futures is safe but, like other futures contracts, they are a leveraged investment and may entail more than average risk for those not familiar with the cattle business.