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CATTLE
MARKET BACKGROUND INFO
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.
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.
![[Meat Animal PDI SERIES CHART]](cattle-futures2.gif) The
major demand for Live Cattle is as beef.
Beef is what’s for dinner, (at least that is what the American
Beef Council would like one to think).
The Cattle Industry, through boards and councils (like the American
Beef Council), have taken to marketing in recent years to increase public
awareness of beef, as well as educate people on the nutritional aspects of
beef. This type of target
marketing, with an emphasis on advertising on radio, television and print,
has turned around the consumer’s viewpoint of beef.
After declining since 1986, average per capita beef consumption has
stabilized at approximately 67 pounds per capita retail weight.
Consumption is expected to range from 64 to 67 pounds in the next
several years.
The
bulk of United States produced beef is used domestically, though the
export market for United States Beef is increasing.
Demand for beef tends to increase when the population and income
levels increase. Demand for
the better cuts of meat, referred to as choice beef, has kept pace with
population increases, though rarely exceeding it.
Beef demand is somewhat elastic.
When beef prices increase, people tend to eat more pork, poultry
and pastas. Shifts in public
tastes play an important role in the Cattle population cycle.
The
costs associated with feeding operations have the greatest effect on
dietary changes. As grain
prices increase, the cost to fatten Cattle to market weights increase
causing the cost of beef to the consumer to likewise increase.
Rising beef prices tend to make poultry and pastas more attractive
meal choices than beef.
The
major trends in meat consumption are set by slow-moving, macro-economic
factors, such as consumer tastes, population levels, income levels, and
the like. As such, most of
the following analysis will be concentrated on the supply side.
Live
Cattle Futures Composite Seasonal Chart
Chart compliments of www.tntseasonals.com
Past performance is not necessarily indicative of future results.
Live
Cattle prices tend toward strength in January through March as
transportation routes and the Cattle production cycle tend to create a
period where supply is limited.
When the inland barge routes free up from freezing in the spring,
grain supplies begin to tighten, and the spring calf population increases,
prices usually fall from early March through mid June.
During the summer months beef prices tend to increase due to high
demand from the fast food industry, and Live Cattle prices tend to
increase through to year end, with minor breaks occurring due to spring
born Cattle moving to stocker operations.
![[CATTLE CHART]](feeders-2.gif) Fattening
Cattle is a business requiring two main, raw materials:
Feeder Cattle and grains to feed the cattle.
The demand for Feeder Cattle is usually proportional to the demand
for Live Cattle and the profit margin generated from fattening cattle.
When
profit margins are high, feedlot operators increase the number of head of
cattle on feed, increasing demand for Feeder Cattle.
When profits are small, or non-existent, feedlots decrease the
number of head on feed until profitability increases again.
The major cost associated with fattening cattle is the price of
feed. Corn is the most
commonly used livestock feed in the United States, so Feeder Cattle prices
are negatively correlated to Corn prices (when Corn prices are rising,
Feeder Cattle prices are declining and vice versa).
Also, demand for beef or Live Cattle prices has a great deal of
effect on the price of Feeder Cattle.
The cattle industry, especially the feedlots, is composed of small
independent operators. As a
result, Cattle prices and Feeder Cattle demand is subject to radical
movements.
Feeder
Cattle Futures Composite Seasonal Chart
Chart compliments of www.tntseasonals.com
Past performance is not necessarily indicative of future results.
When grain is plentiful and cheap, as is
usually the case in January through March, Feeder Cattle prices tend to be
strong. This is because the
feedlot operators tend to fatten their Cattle longer to take advantage of
low feed costs increasing the number of Cattle they feed to taking
advantage of the seasonally profitable period. When feed stocks are low
and prices of the grains are strong, then feeder cattle prices get
depressed. Usually the period
from April to June tends to be weak for Feeder Cattle prices. June through
August tend to be seasonally weak periods for Feeder Cattle prices because
the number of spring born Cattle is usually higher.
July is the strongest month for Feeder Cattle prices.
The heat of August usually bulls the grains, and Feeder Cattle
prices tend to bear down under feed cost pressures.
September through the end of the year tend to have strong prices
for Feeder Cattle because feedlots are typically full and red meat demand
is lower than in the summer.
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.
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