Whether they have been watching the price action in futures or not this year, most people know that beef prices are higher. Whether it is the steak at the grocery store, the menu at their favorite restaurant or the beef sandwich for lunch, costs have gone up. This is part of a multi-year move higher in beef prices that started with the drought a few years ago. This caused stress on the feeder cattle market, which takes years to flow through the live cattle market. As you can see in the chart above, both Feeder Cattle and Live Cattle prices have been in a strong upward trend in the last 12 months, continuing on the moves seen at the 2020 lows. Even though feed costs have been down all year, the lack of supply and continued strong demand push prices higher.

Cattle production is the most important U.S. agricultural industry, consistently accounting for the largest share of total cash receipts for agricultural commodities. In 2024, U.S. cattle production represented about 22 percent of the $515 billion in total cash receipts for agricultural commodities. Believe it or not, the U.S. still imports a lot of cattle, with Canada and Mexico being the primary source of these imports. The chart above from the USDA shows that the majority of the cattle that are imported are for feeding and not for immediate slaughter. However, as prices have gone up 170% in the last few years, the number of cattle for immediate slaughter has also risen. While Canada and Mexico will also import U.S. beef, this makes up only 19% of U.S. exports. Exports primarily go to Asia, with Japan, South Korea and China, making up 58% of exports. Trade deal headlines are clearly a net positive for potential demand, but it is not demand that is needed in the market right now.

As I mentioned, the U.S. cattle market is facing a supply and not a demand problem. The U.S. cattle herd peaked in 2019 at 94.7 million head. The latest USDA data in January of 2025 put the herd at 86.7 million head. Fewer feeder cattle mean the future supply of live cattle will be lower as well. The U.S. has attempted to solve this by importing more feeder cattle to reduce the stress in the system. However, those plans were thrown for a loop when a disease – the New World screwworm – was found in cattle in Mexico. Flesh-eating bacteria are not only incredibly detrimental to the herd, but can pass over to humans as well. Thus, caution from authorities is the rule of the day. The screen shot above comes from the USDA, which extended the ban on cattle from Mexico from coming into the U.S. because of this bacteria. In fact, this latest update tells us that the bacteria is found just 70 miles from the U.S. border, which is concerning in and of itself. For a market struggling with supply, this was not necessarily welcome news, though it is clearly prudent news.

With the stories of the screwworm bacteria, the price of feeder cattle to live cattle has exploded higher. Before that, the drought conditions in the early 20s were already leading to a higher cost of feeder versus live cattle but that spread doubled again. As you can imagine, this puts an incredible amount of risk on the cattle feeders. If they buy these feeder cattle at prices not seen before, will they get their money back when they sell the live cattle? Their input costs have gone up materially, which potentially risks their demand for live cattle, meaning the supply problems seen in the feeder market flow through into the live cattle market. Can this inflation continue in both markets without hurting demand? Will U.S. trade prevent producers from even being able to sell to their biggest export market? While the cost of corn has been helping them, this is but a small part of the bigger decisions that need to be made.

The current administration is focused on inflation. It knows it won the last election because consumers are fed up with inflation and want some change. However, up until now, prices for all goods have been stubbornly sticky. Prices for goods like beef have gone the wrong way. Perhaps this is why the administration decided to make a decision that seems to be at odds with its voter base. One might think that the administration wants to do what it can to help the producers. However, the latest headline is that the president will import beef from Argentina in order to help reduce the cost of food. While many wonder why the U.S. got so involved in Argentina, there are perhaps more reasons beneath the surface. First, it can help reduce the supply of Argentinian soybeans hitting the market, driving down prices on a stressed product. Second, it can provide beef to the market that is very undersupplied at the time being. This can potentially buy some time until the domestic market gets back into balance on supply and demand. The problem, though, is that cattle feeders that need to pay up for feeder cattle, at a spread they have not seen before, now see the price of the end product falling in the U.S. This creates a very conflicting picture for the cattle feeders at the moment.

While the cattle feeders may be conflicted, the traders were not. This news of Argentinian imports hit the market pretty hard. In what was, and still is, a strongly trending market, the headlines caused prices to fall below the 1- and 3-month moving average with the next stop the 1-year moving average near $212, a far cry from the $245 markets just saw. In addition, the MACD is crossing over and heading lower confirming this price action and the potential for moving to $212. While that seems like a long way to move from here, it would only put prices back to where they were earlier this spring. This still may not be enough for the administration that is focused on year over year inflation, but it might be a welcome relief for consumers who have seen prices rise all year.

How are traders positioned in the Live Cattle market? Perhaps not surprising, but Managed Money is still quite long Live Cattle futures. Positions are a bit off the highs seen in January 2025 but are still the longest we have seen over the last 5 years. Given the market was trending so strongly upward, this may not be surprising. However, given the recent headlines and price action, this also may suggest that long positions have much more room to go to get square. More potential selling pressure if the faster Managed Money accounts desire to reduce positions as prices breach the 1- and 3-month moving averages.

With so many stresses in the Cattle market, traders may not be surprised to see the level of implied volatility, as measured by CME Group CVOL Index, are near the highest over the past year. While many of the Agricultural volatility levels are simply in the middle of the 1-year range, Cattle are still showing signs of uncertainty and a desire for traders to own optionality. With the latest headlines on both Mexico and Argentina, coupled with rumors of trade deals with Asia, one might surmise that traders have even more uncertainty on the direction of futures price, and therefore might have even more appetite for owning volatility. The bottom chart shows the Skew Ratio as compared to the underlying price. While prices are still near the highs of the year, there has been a sharp pick-up in the demand for downside options vis a vis upside options. The Skew Ratio falling from 1.0 (indifference to upside vs. downside) to the recent reading of 0.86 indicates strong demand for downside options, relatively speaking. Perhaps hedging longs, perhaps speculating on further moves, it is worth noting that not only are overall implied volatility levels elevated, but the implied volatility for downside options is even more elevated.

The Live Cattle market has been hit with strong crosscurrents of information, which typically mean options are the optimal way to express a view. Limits on imports for Mexican feeder cattle only cause more of a supply/demand imbalance. Cattle feeders having to pay an extreme spread for feeders may only see this spread widen given the lack of supply, causing their profitability to suffer. However, demand for U.S. beef may pick up with recent trade deals signed between the U.S. and Asian countries, the biggest source of demand for U.S. beef. Making it more difficult are the headlines that show the U.S. administration plans to import beef from Argentina, in an attempt to lower prices in the stressed beef market. Will cattle feeders get back the prices they pay for feeder cattle? Just as important is trader positioning, which is historically high, but may need to shift given the negative Live Cattle price action on the Argentina news. Options may certainly be the best way to implement views, however, the level of implied volatility is at the highs of the year and the price for downside options is even higher still. How can a trader position or how can a producer hedge?

I believe the idea here provides a good way for people to position for a downside move even in a market where the prices for options is quite high. Looking at the December expiration, the trade presented is selling a $239-244 call spread and using the proceeds to reduce the cost of a $230-220 put spread. The net cost for this is 0.91 for each contract traded, meaning the breakeven on the downside comes in at 229.09. Looking at the charts, a move and close below $230 points to the $212 level. While prices may not get all of the way there, hedgers or traders will want to take advantage of a large potential move, thus keeping the put spread strikes $10 wide. On the upside, selling the $239 calls yields a good premium as it is close to at the money. However, if prices shake off the recent headlines, and the focus shifts to long-run supply and demand, which has not been fixed, there is scope for a continued trend to be higher. Thus, covering the risk of the $239 calls at the year’s highs of $244 makes sense, because this would indicate this recent move lower was nothing more than a head fake.

The risk for traders is a move higher with the maximum loss being the $5 difference in the call spread strikes plus the premium spent, so 5.91. The maximum gain is 9.09, the difference between the put spread strikes less the 0.91 premium. This gives a reward-to-risk of 9.09/5.91 or 1.54. Hedgers may not see the need to sell the call spread to buy the put spread, but the put spread on its own costs 2.34 so this presents a 61% reduction in premium cost.

It is worth noting that CME Group has recently launched Live Cattle Monday Weekly options. They are based on the front-month futures and have an expiration every Monday. The contract design is the same as a standard option, only difference being when the option expires. This can be another tool to leverage for short-term swings in an uncertain Cattle market.

Wild crosscurrents in the market make for a desire to use options to implement ideas. However, when everyone has the same feeling, implied volatility can move up, making it difficult to find the right trade. Being willing to sell the part of the distribution you are less worried about, to reduce the cost of the trade you want exposure to, is an important tool in the traders or hedgers toolbox. Structuring your idea correctly on the way into a trade can give you more staying power when prices are swinging in the market.

Good luck trading!

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