There are many factors that affect the value of livestock, such as technology, feed costs, herd expansion or contraction, consumer demand and even weather. When examining market forces that impact prices of hogs and cattle, market participants should also consider livestock cycles and seasonality.
Livestock inventory and production tend to follow predictable cycles, which are helpful in predicting phases when herds are expanded or contracted, and the possible direction of price movement. A cycle refers to the trough, or low points, and the peaks, or high points, in herd inventory. A full cycle consists of the time between one trough and the next trough,or one peak and the next peak. Hog cycles typically last an average of four years, while cattle cycles last about 10 years.
In the expansion phase of a cycle, an increase in livestock prices may encourage producers to retain female animals to increase the herd, which can reduce supply and cause further price increases. Then, production of offspring by these females may result in an oversupply, causing prices to decline and triggering producers to cull their herd and send them to market, starting the contraction phase of the cycle.
During contraction, the additional females that are going to the market, rather than going into the breeding herd, tend to increase supply even more and could cause prices to decrease further. The expansion phase is dictated by the time it takes for female animals to reach breeding age and produce offspring, while the contraction phase in influenced by price fluctuations.
As with production, seasonality trends in livestock supply and demand are affected by factors that change with reasonable regularity throughout the year. This includes calving and farrowing, when newborn cattle and hogs enter the herds; the traditional grilling of meat during the summer barbeque season; and various seasonal holiday demands, such as the desire for ham during winter and Easter celebrations.
Most importantly, hog and cattle prices show regular trends where seasonal low prices are established during the months when animals are typically brought to market and seasonal high prices occur during feeding months, when the supply of market-ready animals is at its lowest.
Seasonality indexes, which are available from the USDA, provide a view into how these trends traditionally develop throughout the year. For participants in the livestock market, a basic grasp of production cycles and seasonal trends will play a major role in acquiring sound price forecasting techniques, which will in turn contribute to the development of effective trading or hedging strategies.
CME Group Livestock futures and options offer a variety of tools to help meet risk management and trading needs.
Test your knowledge
In case you didn’t know, the CFA Institute allows its members to self-determine and report continuing education credits earned from external sources. CFA Institute members are encouraged to self-document such credits in their online CE tracker. CME Institute offers a variety of courses, webinars, and white papers to support your professional education.