🐄 Your Guide To Investing In Feeder Cattle, The Stage Where Cattle Are Fed Before Becoming Live Cattle.
Basically, feeder cattle are cattle that have reached a weight of 600–800 pounds and are then placed in feedlots where they’re fed high-energy feed to increase weight gain to become live cattle. Both feeder & live cattle are traded commodities & there are differences between them. The main difference is that because you’re relying on the development of a living animal, there are a couple of additional factors that can affect prices.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding feeder cattle to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, feeder cattle can certainly act as a hedge against inflation & a weak US dollar. This is because as a food commodity, feeder cattle is a necessity and will be always be in demand, even during times of inflation.
💰 Profit. Similar to live cattle, feeder cattle also shows seasonality & cyclical swings in terms of prices. This presents opportunities for traders to speculate & profit. As highlighted in the previous newsletter, a popular tool that traders use is the “cattle crush spread”, which basically simulates a feedlot business without actually dealing with the animals and equipment, which is mainly done through futures contracts. In the long term, global growth & increasing demand from emerging economies such as China could certainly act as support for both live & feeder cattle prices.
What Affects Feeder Cattle Prices
In terms of factors that affect prices, live & feeder cattle share quite a lot in common, so you will see some of the same ones. However, there are a couple key factors that have more weight in moving prices:
- 🇺🇸(🇧🇷) US (Brazil) Production. Similar to live cattle, the feeder cattle market is mostly characterised by futures & cash market prices in the US, partially because the US is the biggest producer of beef & veal, and partially because feeder cattle futures contracts use cattle that are born & raised exclusively in the US. That being said, futures contracts are traded globally, and beef exports from other countries (Brazil, EU & China are also big producers) could take away from US market share and add to overall supply, which could put downward pressure on prices.
- 🌍 Global Beef Demand. Although the main use of feeder cattle is to eventually produce live cattle, the overall demand is for beef production, so beef demand is one of the biggest factors in driving both feeder & live cattle prices. Beef tends to be more expensive than other meats like pork or poultry, so when the global economy is strong and when consumers have higher purchasing powers, demand tends to be higher, and vice versa during recessions, which tends to lead to lower demand. Also, consumer preferences are always changing. If an event occurs that would impact demand for imported US beef, then this could affect prices too.
- 🔄 Alternatives. Substitution also affects feeder cattle prices. As mentioned above, beef tends to be more expensive than other meats like pork or poultry. Furthermore, a small but growing percentage of the population are reducing meat consumption (or eliminating it from their diet entirely) for various reasons, opting for vegetarian or vegan alternatives.
- 🌽 Feed Prices. Again, similar to live cattle, the price of feed (like corn, soybeans, etc.) can affect feeder cattle prices, but not in the way you think. When feed prices go up, feeder cattle ranchers might sell their feeder cattle to the market early to avoid rising costs. This could then lead to oversupply in the short term, which then lowers prices. On the other hand, if feed prices are low, ranchers might keep their feeder cattle to grow them to live cattle, which then lowers supply in the market. So, like live cattle, feed prices tend to be inversely correlated with feeder cattle prices.
- ☀️ Seasonality/Weather. Feeder cattle prices also tend to show seasonal cycles, with both supply & demand factors that contribute to this. However, because we’re dealing with the growth of live animals, weather can definitely have an immediate impact
- On the supply side, poor weather conditions could cause a lot of problems. Firstly, it has a big impact on feed prices since it can impact supply, which then increases feed prices, which would then force ranchers to sell their feeder cattle early & create an oversupply in the market, dropping prices. Really cold weather could affect cattle weights when they’re in feedlots as they use energy to keep warm instead of converting it to muscle & fat. In the extreme case, it could also lead to death & sickness, which then lowers supply. Also, if it’s too hot, it could lower feeder cattle appetites, extending the time it takes for them to grow.
- The demand side is pretty much the same with live cattle. It’s more about consumer behaviour. Generally, people eat fast food more during spring & early summer months, rather than winter. Don’t forget about grilling season where retail sales of beef go up.
- 📝 Cattle on Feed Report. This report can also affect feeder cattle prices since it’s an extensive monthly report, published by the USDA, which has data on how many cattle & calves are on feed (basically pre-feeder cattle), how many cattle are in placements (feeder cattle, placed in feedlots where they’re fed to gain more weight), & how many cattle are marketed (shipped out of feedlots to be slaughtered). Traders, producers & meat packers use this to understand supply in the market as well as any changes.
- 🛢️ Energy Prices. You might be surprised to know that energy commodity prices (crude oil, natural gas, etc.) can indirectly impact feeder cattle prices. As mentioned in our corn newsletter, because of corn’s role as a biofuel, there’s a strong correlation between corn & other energy commodities. As a food crop, rising corn prices can push up the prices of other crops too, which could force ranchers to sell early. On the other hand, lower energy prices could also mean lower ethanol (and therefore corn) prices, allowing ranchers to keep feeding their feeder cattle. Also, lower energy prices means consumers have more spending power since they’ll have to pay less to heat homes & fuel cars, and could fuel beef demand as they go to restaurants, etc.
Who Trades/Invests In Feeder Cattle?
- 👩🌾👨🌾 Cattle Producers & Ranchers. Cattle producers might purchase feeder cattle (& the feed) to then grow them into live cattle & to profit from the difference. On the other hand, ranchers might sell their feeder cattle early to avoid rising feed costs & to cut their losses.
- 🏦 Traders. Traders might buy feeder cattle (& the feed) to simulate what cattle producers do and to profit from the difference too, called the “cattle crush spread”. This is mainly done via futures contracts though, which can be quite complicated.
What Is It Used For?
Although the main use of feeder cattle is to be grown into live cattle, the focus is still nevertheless the main uses of live cattle, since it also drives feeder cattle prices. As a reminder, these include:
- 🥩 Beef. Quite obviously, cattle are mainly used for beef production.
- ⚽ Hides. The skin of the cattle is used to make a range of products including leather, footballs, brushes, some textiles, etc.
- 🧼 Beef Fats. Beef fat can be used to make soaps, hand creams, lubricants, face creams, lipsticks, detergents, and more.
- 🦴 Bones, Horns, Hooves. You might be surprised, but these are used too, making products like buttons, piano keys, glues & fertilisers.
- 🍦 By-Products of Beef Production. These include other organs & offal, a food source for many countries, as well as gelatin extracted from bones, used to make marshmallows, ice cream, desserts, etc.
The Case Against Feeder Cattle
Generally speaking, because feeder cattle eventually becomes live cattle, the risks involved when trading or investing in feeder cattle are pretty much the same as live cattle since the main goal is beef production & the demand for it. So, like live cattle, feeder cattle prices can be pretty vulnerable to shocks in the market that disrupt supply & demand dynamics. As mentioned above, if the global economy isn’t doing so well, consumers may choose alternatives & lower beef demand. Additionally, since demand is mostly down to consumer preference & behaviours, any negative perceptions towards beef could also lower demand. Part of this would include environmental & animal rights concerns, both of which have negatively impacted the image of the cattle industry. Lastly, remember that these are live animals, so they’re susceptible to diseases, such as mad cow disease. An outbreak could certainly scare off consumers & potentially lower demand. Additionally, climate change could have an impact on crop production, which, in turn, could lead to an oversupply of feeder cattle in the market, pushing down prices.
The Case For Feeder Cattle
Feeder cattle is still a commodity and can help diversify one’s portfolio & protect against inflation. This is because it’s almost certain that beef will continue to be in demand, even during times of inflation. Furthermore, as mentioned in the previous article, the possible main reasons to be bullish for feeder cattle is consumer demand. As the global population increases & as emerging economies become stronger, demand for beef may increase. The US is currently the biggest producer of beef & veal, and so an increase in global demand should be reflected in feeder cattle futures prices. USDA data suggests that in recent years, domestic consumption of beef emerging economies (especially China & South Korea) is increasing at quite a significant rate, and is expected to continue in the short term.
Popular Ways To Invest In Feeder Cattle — Pros/Cons of Each
As you can imagine, you can’t invest or trade in physical, feeder cattle! You also can’t invest in feeder cattle companies because most ranchers that raise & sell cattle are private, not public. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Feeder Cattle ETNs. You’re pretty limited here since there’s no ETF/ETN that invests specifically in feeder cattle. However, there are ETNs that invests in livestock in general, in continuously rolling feeder cattle futures contracts. Because of this, you’re not just exposed to feeder cattle futures prices, but a number of others as well. Regardless, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since it’s an ETN, you are essentially buying a bond, an IOU, a debt note, and not in actual, physical feeder cattle. Be sure to read the fine print & understand the risks and costs involved.
- Feeder Cattle Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell feeder cattle at a specified time in the future with an agreed-upon price. A standard contract deals with 50,000 pounds of feeder cattle! These futures contracts are financially settled (not physically delivered) after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in feeder cattle prices can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. It really is quite similar to live cattle, with a couple minor differences. The main use of feeder cattle is to feed & grow them to become live cattle, ready for beef production, so demand for feeder cattle will be heavily influenced by beef demand, i.e. consumer behaviours & preferences. That being said, because it’s a food commodity, it almost certain that it will always be in demand, which means that feeder cattle prices should respond positively in times of inflation. Furthermore, there are certainly opportunities for speculation & profit. There’s certainly more emphasis on the impact of the weather & energy prices on feeder cattle prices (more so than live cattle prices) since you’re dealing with the development of a live animal. This, in addition to the long production cycle associated with feeding feeder cattle can lead to seasonal price cycles, assuming the market is stable.
Just another reminder of the “cattle crush spread” traders use to trade feeder cattle: cattle traders look at the relationship, or the price spread, between live cattle, feeder cattle & grain prices. One example is the “cattle crush spread” where a trader uses a combination of corn, live cattle & feeder cattle futures contracts to pretty much simulate the feeding-to-slaughter process that producers go through, without the hassle of taking care of the animals. By simulating the input costs (corn & feeder cattle) with output sales (live cattle), you can pretty much profit like you would if you had a feedlot operation, without additional costs & worry of keeping the animals. More about this here and here.
🧺 If you are considering adding feeder cattle/livestock to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your feeder cattle/livestock position so you can take advantage of any volatility in the market.
💰 If you are considering adding feeder cattle/livestock for speculation and profit, you may want to monitor the factors that affect feeder cattle prices mentioned above. You may also want to keep track of quarterly reports of world production, consumption & stock levels released by the USDA, as well as the monthly Cattle on Feed reports on cattle on feed, cattle placements & marketed cattle, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on feeder cattle’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.