Trading Live Cattle via Contracts for Difference (CFDs)
Before diving into the specifics of Live Cattle, a solid understanding of how CFDs work and how they differ from buying futures contracts is required. These are some of the key features of trading Live Cattle through a CFD:
- A CFD is a cash-settled derivative. This means you never physically buy, sell, or take delivery of Live Cattle. You are speculating on a contract that is made to track the prices of Live Cattle futures in major markets. Using CFDs thus allows you to speculate on Live Cattle prices without ever having to worry about rolling over a futures contract or undertaking physical delivery.
- CFDs allow you to use leverage, enabling you to use your capital more effectively. Using leverage wisely allows you to hold multiple positions at a time without tying up all your capital in just one asset. It also allows you to size up positions and potentially make significant profit from intraday swings that would otherwise achieve only a small percentage gain. Leverage is a tool; when used wisely, it can increase potential returns, but if used without understanding, it will amplify the size of losses.
- Unlike a physical investment, holding a CFD position past the daily market close typically incurs an overnight financing charge (or 'swap fee'). This cost makes holding positions for long periods less profitable. Therefore, the strategies discussed below are suited more for short- to medium-term trades instead of longer-term investments.
The Biological Lifecycle of Beef Production
Understanding the lengthy and complex lifecycle of beef production is crucial, as it fundamentally dictates the market’s inherent supply response. The process, from conception to market, is typically divided into three distinct stages:
- Cow-Calf Operations: The initial phase is focused on breeding, calving, and raising young animals.
- The Stocker/Grower Phase: Once calves are weaned, they are moved to this stage, typically grazing on pasture. The primary goal is healthy skeletal development and weight gain before the transition to intensive feeding.
- The Feedlot Stage: This is the final and most capital-intensive phase. Calves, usually weighing between 300 and 400 kilograms, are confined to feedlots for four to six months. They are given a high-energy, carefully controlled diet to reach market weight, typically between 550 and 650 kilograms. This stage yields the finished, or “fed,” cattle traded in financial markets.
The combined gestation period (nine months) and the time needed to reach market weight (18–24 months) means it takes 2 to 3 years for new supply to materialize. This biological constraint introduces significant supply inelasticity. Even record-high prices cannot induce an immediate increase in output from producers. This lengthy lag is a key factor contributing to high market volatility and the potential for sudden, severe price spikes.
Fundamentals of the Live Cattle Market
The Cattle Cycle
The Live Cattle market is uniquely influenced by a long-term cycle, observed since the 19th century, reliably predicting periods of supply expansion and contraction. This cycle, averaging 8 to 12 years from peak to trough, is fundamentally driven by the delayed supply response of producers to prices.
| Cycle Phase |
Inventory Levels |
Herd Behavior |
Price Expectations |
| Contraction (Current) |
Gradually Decreasing |
Producers are sending more breeding cattle to slaughter due to high feed costs |
Historically High, Strong Premiums |
| Trough |
Absolute Lowest Point |
Farmers start keeping more young female cattle for breeding |
Extreme Volatility, Potential for Price Plateau |
| Expansion |
Gradually Increasing |
Lower female slaughter, the number of young calves starts growing, but it takes two years for this supply to hit the market |
Prices begin to decline as the market expects future supply increases |
| Peak |
Absolute Highest Point |
High slaughter rates, inventory correction begins |
Sharp decline as supply reaches its highest point |
The following chart will allow you to visualize this cycle:
Note that these four distinct cycles aren’t always exact, and they will differ in both length and price changes compared to previous cycles. But this knowledge is still essential, as it creates a framework for understanding how cattle prices evolve.
The Live Cattle - Feeder Cattle - Corn Relation
For calves to get up to the required size, they need to eat a lot of grains before they get to the desired 550-650 kilogram range (1200-1400 pounds). They typically require 1.5 to 2 tons of consumed feed to mature from the feeder to the Live Cattle stage. This feed ends up being the biggest production cost.
Historically, there has been a clear inverse relationship between corn prices and the price of feeder cattle. The two largest expenses for a cattle feedlot are the price paid for the calves (feeder cattle) and the cost of the grains required to grow the animal to its required size. The feedlot’s revenue comes from the price difference between the price paid for Live Cattle and the cost of the calves + their feed. When the price of corn sharply increases, the feedlot faces an immediate increase in costs. Because the price at which they can sell the Live Cattle at the futures market is relatively rigid in the short term, the feedlot has to cut costs to keep the business profitable. The fastest way to do so is to lower the price they are willing to pay for the raw material.
Corn Price ↑ ⇒ Cost of Gain ↑ ⇒ Price of Calves ↓ ⇒ Price of Live Cattle ↓
The high cost of corn also encourages feedlots to seek out cost-effective substitutes. Key commodities used in the feed basket beyond just corn include soybean meal, Dried Distillers Grains with Solubles (DDGS), and Grain Sorghum. DDGS, a co-product of ethanol production, is a valuable high-protein and high-energy ingredient often used to replace soybean meal and corn in cattle diets. Traders must monitor the prices of these substitutes, as a rise in corn may not cause significant price increases for Live Cattle as much if feedlots can economically switch to cheaper alternatives like DDGS.
Sentiment Analysis and Key News Reports
U.S. Department of Agriculture reports
The USDA releases key reports that are highly influential in the Live Cattle market:
- Cattle Inventory Report: Released biannually in January and July. This is the most crucial long-term release, providing the total cattle headcount, including the inventory of beef cows and replacement heifers. It is the primary data source for tracking the progression of the Cattle Cycle.
- Cattle on Feed Report: A monthly release that updates placement volumes and the total inventory of cattle currently in feedlots. This report is essential for signaling near-term slaughter supply.
Commitment of Traders (CoT) Report
As with other U.S.-traded futures contracts, the weekly CoT report provides crucial insight into the positioning of various market participants. Specifically, open interest and net positioning across categories like Managed Money (institutional speculators) and Commercials (industry hedgers).
Proprietary trading strategies will often utilize CoT data by countertrading extreme Managed Money positioning (e.g., institutional speculators are over-committed) or by analyzing extreme Commercial positioning as informed sentiment, assuming that industry insiders are locking in what they perceive as favorable exit pricing.
However, trading Live Cattle and soft commodities in general is not as simple as following Commercials’ positions or fading extreme Managed Money positioning. The CoT is best used as confirmation for an already existing trade idea. For example, someone who’s been closely monitoring the Cattle Cycle and thinks inventory is at its very lows, might have a short bias but wait for more short positioning in the Commercials category before entering a position.
A key feature of using the CoT report is to analyze positioning dynamically over time, not statically. Doing so will allow traders to distinguish what constitutes normal versus extreme behavior for various market participants.
Conclusion
Trading Live Cattle requires a disciplined approach that integrates technical analysis with a deep understanding of its unique fundamental and biological drivers. The extended lifecycle, the multi-year Cattle Cycle, the crucial relationship with feed grains, and the impact of key USDA and CoT reports are all vital components.
By integrating these factors, traders can develop robust trading setups.
Ready to integrate the Cattle Cycle and feed grain dynamics into your analysis?