🐄 Your Guide To Investing In Live Cattle. Live, Full-Grown Cattle Are Also Tradable Commodities!

Brief Background

Live cattle are basically live, full-grown cows that are ready to be sold, to be sent to slaughterhouses to produce beef as well as a number of by-products. There’s a similar livestock commodity in the market known as feeder cattle. These are calves that have transitioned away from a mostly grass diet to being placed in a feedlot where they are fed a high-energy diet, to grow a bit more before they can be classified as live cattle. Though they are similar, there are slight differences that affect their supply & demand dynamics. This article will focus on live cattle, whereas the next one will focus on feeder cattle.

What Can It Do For You

🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding live cattle to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, live cattle can certainly act as a hedge against inflation & a weak US dollar. This is because as a food commodity, live cattle is a necessity and will be always be in demand, even during times of inflation.

💰 Profit. As you can see below, live cattle prices tend to undergo cyclical swings due to the seasonal supply & demand dynamics that drive live cattle prices. These past few years have especially shown a cyclical pattern, which certainly presents opportunities for profit. In the long term, global growth & increasing wealth in emerging markets (especially China) could certainly boost demand for beef.

Price chart of live cattle (blue) & feeder cattle (orange) futures contracts over the years.

What Affects Live Cattle Prices

There are several key factors that are involved in moving the price of live cattle:

• 🇺🇸(🇧🇷) US (Brazil) Production. The live 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 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. The main use of live cattle is beef production, so beef demand is one of the biggest factors in driving 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 live 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. As you might imagine, the price of feed (like corn, soybeans, etc.) can affect live cattle prices, but not in the way you think. When feed prices go up, producers might sell live cattle to slaughterhouses a bit early to avoid rising costs. This could then lead to oversupply in the short term, which then lowers prices. So, feed prices tend to be inversely correlated with live cattle prices.
• ☀️ Seasonality/Weather. Live cattle prices tend to show seasonal cycles, with both supply & demand factors that contribute to this.

On the supply side, poor weather conditions could cause a lot of problems. Drought could dry up pastures & increase feed 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.

On the demand side, 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 is a 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.

🎢 What Happened During That 2011–2016 Roller Coaster Ride?

It all started with a really bad drought in 2011. It affected a lot of countries, and it hit America’s southwest states pretty hard too. The problem is that these states are agriculturally (& economically) significant. The drought meant that grass on pastures dried up. This forced a lot of producers to sell their cattle early to be slaughtered, in addition to buying more feed for their remaining herd. The problem with this, is that this then reduces future supply. The drought continued on for a number of years, pushing up costs, forcing producers to sell early, and so on. All this meant that supply & inventory levels eventually became tight as herd sizes shrank. At the same time, consumer demand for beef kept building, partially due to increasing global demand for US beef at the time, and partially because consumers are willing to pay more for better grades of beef.

However, those high prices eventually became an incentive for producers to start rebuilding their herd to meet the demand. The drought eventually recovered, & more cattle meant increased beef production & stock levels. This not only recovered the supply side of the market, but boosted it too. Because you’re dealing with live animals with pretty much a year-long cycle from birth to slaughter, as you can imagine, it’s not easy to adjust supply, especially if you have an overproduction. On top of this, on the demand side, though retail prices did drop, it didn’t drop enough to increase further demand to satisfy higher production. Eventually, prices went down further & further until it reached a level where consumer demand can support prices.

Global beef & veal production. Notice how China’s domestic consumption has been increasing in recent years, and how production isn’t able to meet its demand.

Global beef & veal imports & exports. China has also been significantly increasing imports in recent years, as has the US to a lesser extent.

Cattle on Feed January 2021 Report, showing data on cattle & calves on feed, cattle placed on feed (in feedlots), & marketed cattle (sent to slaughterhouses).

What Is It Used For?

Although the main use of live cattle is beef production, other parts of the cattle are also used to create a variety of products:

• 🥩 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 Live Cattle

There are a number of risks involved when trading or investing in live cattle. As a livestock commodity, live 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.

The Case For Live Cattle

Live 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 above, 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 live 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 Live Cattle — Pros/Cons of Each

As you can imagine, you can’t invest or trade in physical, live cattle! You also can’t invest in live 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.

• Live Cattle ETNs. You’re pretty limited here since there’s no ETF/ETN that invests specifically in live cattle. However, there are ETNs that invests in livestock in general, in continuously rolling live cattle futures contracts. Because of this, you’re not just exposed to live 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 live cattle. Be sure to read the fine print & understand the risks and costs involved.
• Live Cattle Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell live cattle at a specified time in the future with an agreed-upon price. A standard contract deals with 40,000 pounds of live cattle! These futures contracts are settled physical delivery after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in live 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. The main use of live cattle is beef production, so demand for live cattle will be heavily influenced by 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 live cattle prices should respond positively in times of inflation. Furthermore, there are certainly opportunities for speculation & profit. Weather plays an important role in both supply & demand aspects of this commodity, so prices tends to show cyclical seasonal patterns.

Live 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 live 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 live cattle/livestock position so you can take advantage of any volatility in the market.

💰 If you are considering adding live cattle/livestock for speculation and profit, you may want to monitor the factors that affect live 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 live 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.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.