Chapter 2-3 Livestock and Meat Commodities

Commodity

Contract Size

Currency

Main Exchange

Trading Symbol

Lean   Hogs

40,000 lb (20 tons)

USD ($)

Chicago   Mercantile Exchange

LH

Frozen   Pork Bellies

40,000 lb (20 tons)

USD ($)

Chicago   Mercantile Exchange

PB

Live   Cattle

40,000 lb (20 tons)

USD ($)

Chicago   Mercantile Exchange

LC

Feeder   Cattle

50,000 lb (25 tons)

USD ($)

Chicago   Mercantile Exchange

FC

 

Lean Hogs

Hogs, or pigs, are the often underestimated and humble livestock that have likely been domesticated for thousands of years. A global source of meat believed to be descended from the wild boars of Eurasia; pigs are unique in that they are likely livestock for settled farming communities rather than nomadic peoples since they are not easily herded for long distances. Pig, swine, shoat, piglet, boar, hog, stag, gilt, sow, or barrow; no matter how you describe them, these animals are an integral part of food and economics for many countries across the globe.

A larger percentage of hog production occurs in the Midwestern United States and the largest individual state production falls to Iowa, North Carolina, Minnesota, and Illinois.

Globally, productions are distributed as shown:

ES-futures-chapter-2-3-1

Seasonality

Seasonal marketing pressure increases during March and persists at increased levels during all or part of April. The reason for this is that August and September farrowings are usually larger relative to other farrowing months.  Slaughter levels decline seasonally from March-April into July or August. Thus, prices could generally be expected to rise from March to May and decline from May into August.

Key Uses

The obvious end use for lean hogs is meat (pork) however; the hide, hairs, and lard are also useable products. Pork fat may be found in weed killers, cosmetics, crayons, and other commercial products.

Pork Bellies

Pork bellies – the streaky meat from the underside of a pig – are the source of “American style” bacon. Since the ancient Chinese started preserving and salting pork around 1500 BC, it is likely pork is one of the oldest preserved meats.

Nowadays, the belly may be flash frozen and stored. These contract specifications refer to the CME contract.

A larger percentage of hog production occurs in the Midwestern United States and the largest individual state production (from the top producer down) includes Iowa, North Carolina, Minnesota, and Illinois. Early access to the eastern coastal cities of the United States via the Erie Canal may have helped create this farming trend. Although pigs are often said to have large appetites and consume everything in sight, today’s farming practices tend towards careful diets that result in leaner meat. Most of the feed for hogs will contain corn or soybean meal, likely linking this market closely to grain markets. A large percentage of the thiamin in the average person’s diet comes from pork.

If you are trading any pork product, you will want to be aware that the USDA issues a Quarterly Hogs and Pigs report that details domestic hog inventories, as well as the birate (a farrow is a litter of pigs or, as a verb, means to produce a little of pigs) and litter sizes for breeding sows. Cold storage reports will also detail monthly supplies of pork bellies. In addition to the prior reports, the following variables may be taken into

Key Uses

Feed Costs – Higher feed costs, particularly corn, can typically affect the weight and rate at which a farmer will take hogs to market. If farmers were to bring more hogs to market at lower weights to save on overall feed costs, this may increase supply and possibly depress prices.

Domestic and International Demand – Like other meats, there are regional and religious preferences which can impact the demands for pork. Certain advertising campaigns can work to increase consumption and any health concerns associated with one type of livestock can possibly result in a substitutive demand for another. Trade agreements and available markets for US exports are also of fundamental interest as well as the recent suggestion that increasing wealth in developing nations also increases the regular consumption of meat. Adverse reactions

may exist when topics such as Swine Flu make headlines. Pork bellies are a food product for bacon or other dishes. Pig fat may even be used for various household items such as weed killers, crayons, antifreeze, or chalk.

Live Cattle

The word cattle can conjure images of wild prairies and rugged western landscapes, cattle drives, wealthy barons, and cowboys. The beef and cattle industry today is a multi-billion dollar industry, and cattle futures on the CME are not only a means for industry professionals to access hedging opportunities, but also an avenue for speculators to participate in cattle trade – with or without the ten gallon hat.

Live cattle come from feedlots where they have been fed a diet of grains and hay – usually in an average ratio of over eight pounds of feed per one pound of weight gain. When they weigh at or above 1,000 pounds they are sold to packing houses. This general weight range usually results in a 600-pound carcass that can produce just over 400 pounds of meat. These numbers can change based on a few factors, but this helps illustrate a general idea of weights and meat production.

Seasonality

Seasonality in feeder cattle prices depends on the seasonality in live cattle prices, along with annual fluctuations in feeder cattle supplies. In general, feeder cattle prices are strong from late winter through spring, drop during the summer, and stabilize at lower levels in the fall, before turning up in December. Live cattle prices normally trend higher from January through May. Prices for live cattle reach their seasonal peak in May and then usually begin a downtrend that extends through the end of the year. Demand for feeder cattle also begins to peak in May, and prices fall into July.

Key Terms for Live Cattle

Choice beef = the high quality beef, just below prime in the grading system. A little over 50 percent of US carcasses qualify as choice grade. They have less fat and marbling than prime.

CWE – the abbreviation for Carcass-weight Equivalent, the weight meat products “converted to an equivalent weight of a dressed carcass” according to the USDA. This includes inedible bits like bone and ligaments.

Hoof-and-mouth disease = a viral disease that is extremely contagious and can be fatal, It affects many cloven-hoofed animals. An identified breakout can often lead to quarantine and culling of herds.

In addition to the following variables, if you are trading live cattle, you will also want to be aware that the USDA issues reports that may impact the futures market including Cattle on Feed and Livestock Slaughter. These reports (and others) may be found in the economics and statistics sections of the USDA website.

Import and Export = Restrictions and trade agreements can often impact the quantity of imports and exports to and from various countries.

Health Issues = Concerns over red meat consumption and possible links to colon cancer or saturated fat values are often weighed against beef as a rich source of linoleic acid and B vitamins. As health news comes and goes, domestic consumption or demand may be impacted.

Mad Cow Disease = Otherwise known as bovine spongiform encephalopathy, Mad Cow scares can wreak havoc on the cattle industry and breakouts can lead to massive slaughter and burn campaigns. Since the BSE prion cannot be destroyed by cooking, the panic of spread can easily affect both demand and supply of cattle.

Feed Costs = Higher feed costs can typically affect the weight and rate at which a farmer will take livestock to market. Since cattle are fed a combination of roughage, grain and protein supplements (soybean meal is a popular protein source), prices for corn, alfalfa, soybean, and even wheat can impact choice of feed and affect the feed-to-meat conversion – as well as the number of days on the feedlot.

Beef cattle brings us steak, ground beef for hamburgers, roast beef, and a variety of other meat cuts which provide the majority of zinc in the average American diet. Beyond the obvious food products that come from cattle, medicines like insulin and estrogen come from their glands. Cowhide and leather, glue, and fertilizers are all byproducts of the beef industry. Tallow – also known as beef fat – is also an ingredient in various household and hygiene products like soap, candles, and cosmetics. Bones and horns are a source of gelatin used in marshmallows, candies, and other confections.

Feeder Cattle

Feeder cattle futures, like live cattle, provide an opportunity for industry professionals to participate in fair price discovery and possibly try to hedge their interests against feed grain and cattle price changes. The CME Feeder Cattle contract is cash-settled.

Mature cattle, ready to be placed on a feedlot, are referred to as feeder cattle. They generally weigh less than live cattle (animals ready for slaughter) – anywhere from 650 to 850 pounds. The feedlots are often larger commercial operations which bring in feeder cattle to replace the animals sent to slaughter. These feedlots may buy the cattle from individuals or the animals will ultimately belong to an individual who will pay the feedlot for the feed bill.

Feeder cattle are classified according to age, sex, and weight, among other things. Grades range from choice or good down to utility or inferior. Prime cattle are a smaller percentage of animals which appear superior in quality. They are normally from a long line of beef cattle ancestry and have the details which suggest top quality meat.

Heifers are usually female cattle less than three years of age. Steers are likely males castrated before maturity, and a cow is a female which has given birth to one or more calves. There are other fine tuned labels such as stag, heiferette, or bull. Cattle less than a year old are calves. Yearlings are between one and two years of age. Over eighteen months old, and they are short-yearlings.

In addition to the following variables, if you are trading cattle, you will also want to be aware that the USDA issues reports that may impact the futures market including Cattle on Feed and Livestock Slaughter. These reports (and others) may be found in the economics and statistics sections of the USDA website. Possible trends, cattle population, and the number of calves, may impact prices and the time of year may also be perceived as important.

Key Terms for Feeder Cattle

Import and Export = Restrictions and trade agreements can often impact the quantity of imports and exports to and from various countries.

Health Issues = Concerns over red meat consumption and possible links to colon cancer or saturated fat values are often weighed against beef as a rich source of linoleic acid and B vitamins. As health news comes and goes, domestic consumption or demand may be impacted.

Mad Cow Disease = Otherwise known as bovine spongiform encephalopathy, Mad Cow scares can wreak havoc on the cattle industry and breakouts can lead to massive slaughter and burn campaigns. Since the BSE prion cannot be destroyed by cooking, the panic of spread can easily affect both demand and supply of cattle.

Feed Costs = Higher feed costs can typically affect the weight and rate at which a farmer will take livestock to market. Since cattle are fed a combination of roughage, grain and protein supplements (soybean meal is a popular protein source), prices for corn, alfalfa, soybean, and even wheat can impact choice of feed and affect the feed-to-meat conversion – as well as the number of days on the feedlot.
Feeder cattle are destined for feedlots to be monitored and fattened for slaughter. Most feedlots will employ a nutritionist to determine the feed needs of the animals on the lot in an effort to produce the most desirable combinations of muscle and fat. Meat from cattle will be graded according the USDA standards and will fall somewhere in the diagram below:

ES-futures-chapter-2-3-2

Questions