The livestock industry is a global market, with livestock and meat being produced, processed and consumed all over the world. As with many industries, being involved in livestock also means being exposed to risks that could affect profitability. A number of factors can impact livestock production and meat processing and procurement, including weather, disease, the cost of animal feed and changing consumer diets.
Livestock futures began trading at CME Group in 1964, with the listing of Live Cattle futures. The livestock complex now includes futures and options on Live Cattle, Feeder Cattle and Lean Hogs.
CME Group Livestock futures and options provide the ability to manage these market scenarios. They allow participants such as producers, feed lot operators, meat packers, importers and exporters, to deal with the price risks associated with the sale or purchase of livestock and meat products. In the case of speculators, they provide them with tools to capitalize on potential profit opportunities in the livestock markets.
Feeder Cattle are weaned calves that have been raised to a weight of 600 to 800 pounds. A newborn calf averages 70 to 90 pounds when it is born, typically in the Spring. After it is born, it is weaned and allowed to graze for up to nine months in order to reach the minimum weight, at which point it is sent to a feedlot. Once in the feedlot, cattle undergo an aggressive feeding process over the next three to five months, during which they gain an additional 500 pounds to reach a weight of 1100 to 1400 pounds.
Feeder Cattle futures contracts allow participants, such as producers, to hedge a decline in price between the time calves are born and when they are sold to feedlots. It also allows feedlot operators to hedge against an increase in the price of Feeder Cattle before the operator is ready to purchase them for their lot. Feeder Cattle futures trade in units of 50,000 pounds and in minimum price increments, or ticks of $12.50. They are listed for trading in January, March, April, May, August, September, October and November.
At expiration, rather than calling for the delivery of physical cattle, Feeder Cattle futures are settled in cash at a price equal to the CME Feeder Cattle Index on the last day of trading. The CME Feeder Cattle Index is calculated by CME Group staff using data provided by the USDA. The data and formula used to calculate the final settlement price is published on the CME Group website.
After feeder cattle reach the weight range of 1100 to 1400 pounds, they are considered live cattle. This means that they have reached the minimum weight for processing, at which point feed lots will sell the live cattle to meat packers.
Livestock Futures – Live Cattle
Live Cattle futures are designed to allow feedlot operators to hedge against a decline in price before they are able to sell the cattle for processing, and for buyers, such as meat packers, to manage the risk of an increase in the price of the cattle they are planning to purchase for processing, or to protect their profit margin for beef they have committed to ship in the future.
Live Cattle futures trade in units of 40,000 pounds and in minimum price increments of $10.00. They are listed for trading in the even months of February, April, June, August, October and December. Live Cattle is a physically-delivered futures contract, meaning that live steers are ultimately delivered. There are specific standards in terms of the quantity and USDA grade of cattle that can be delivered. The details on the delivery requirements and procedures for Live Cattle futures can be found in the CME Rulebook on the CME Group website.
Lean Hogs refers to a hog that is ready for processing at about 275 pounds. Hogs are mainly produced in the Midwest, and it typically takes about six months for a pig to become market-ready. The carcass of a market hog weighs about 200 pounds and will typically yield about 155 pounds of lean meat, which is the core of the lean hog futures contract.
Lean Hog futures allow sellers and buyers, such hog producers and packers, to manage the risk of adverse price movements in their operations. Lean Hog futures trade in units of 40,000 pounds of hog carcasses and in minimum price increments of $10.00. They are listed in February, April, May, June, July, August, October and December. As with Feeder Cattle, Lean Hog futures are settled in cash at expiration, to at a price equal to the CME Lean Hog Index on the last day of trading.
Again, the data and formula used to calculate the final settlement price is published on the CME Group website.
In 1984 options on Livestock futures were introduced, which provided hedgers and speculators additional flexibility and opportunities. While Livestock futures are only traded electronically, Livestock options are still traded in open outcry on the floor of the exchange, as well as electronically on CME Globex. At every stage of the livestock production chain, from birth to feeding, and processing to packing, market participants face the risk of adverse price movements caused by the twists of the market and supply and demand. Livestock futures and options provide a means to manage this risk as well as to take advantage of potential profit opportunities.