Buying Feeder Cattle Put Options to Profit from a Fall in Feeder Cattle Prices

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FUTURES/OPTIONS; Feeder-Cattle Prices Jump After Drops in Grain Costs

By The Associated Press

    June 2, 1989

Futures prices for feeder cattle soared yesterday on speculation that falling grain prices will encourage feedlot operators to buy more cattle to fatten.

On other markets, grains and soybeans ended mostly higher, bucking the recent trade; copper dropped sharply while precious metals rose, and energy futures were mixed.

Feeder cattle settled 1.18 cents to 1.50 cents higher, with the contract for delivery in August at 77.95 cents a pound. Both the August and September contracts traded up the daily limit.

In other livestock and meat trading, live cattle were 0.15 cent to 0.78 cent higher, with June at 69.05 cents a pound; live hogs were 0.10 cent to 0.45 cent higher, with June at 48.32 cents a pound, and frozen pork bellies were unchanged to 0.65 cent higher, with July at 30.52 cents a pound.

The rally was rooted in perceptions that the sharp drop in corn and soybean futures prices over the last three weeks – a result of increased Midwest rainfall – would reduce feedlot operators’ feed costs, leaving them with more money with which to purchase feeder cattle.

The bullish fever spread to the adjacent live-cattle pit, although lower grain prices are likely to lead to lower, not higher, prices for slaughter-ready animals.

”It’s hard to stand in the live cattle pit and not be influenced by what’s going on right next to you,” said Chuck Levitt, senior livestock market analyst with Shearson Lehman Hutton Inc. in Chicago.

Most grain and soybean futures prices rose on the Chicago Board of Trade, suggesting the markets have absorbed as much rain as is likely to fall in the Midwest for at least a week.

”I think we probably have factored a lot of rainfall into these markets,” said Anne Frick, senior oilseed analyst with Prudential-Bache Securities Inc. in New York.

Recent rains have alleviated fears of a rerun of last year’s drought. Many traders who had sold earlier in the month, hoping that prices would fall, returned as buyers yesterday.

Copper futures prices fell sharply on the Commodity Exchange in New York, reflecting a supply expansion after two years of extreme tightness. Copper consumption is entering a period of seasonal weakness, further contributing to the markets’ softening after a run-up to a record high of $1.6475 a pound in December.

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”This is a market that has kind of gone from miracle to miracle and has run out of support,” said Craig Sloane, a metals analyst in New York with Smith Barney, Harris Upham & Company.

Copper settled 2.45 cents to 3.25 cents lower, with June at $1.102 a pound.

Precious metals recovered slightly from Wednesday’s slide on the Commodity Exchange. Gold settled 80 cents higher across the board, with June at $364.10 a troy ounce; silver was 3.5 cents to 3.8 cents higher, with June at $5.198 a troy ounce.

Oil futures prices were mixed in quiet trading on the New York Mercantile Exchange ahead of the start today of an OPEC strategy meeting in Vienna. West Texas Intermediate crude oil settled 9 cents lower to 6 cents higher, with July at $19.81 a barrel; heating oil was 0.29 cent lower to 0.33 cent higher, with July at 48.09 cents a gallon, and unleaded gasoline was 0.47 cent to 1.21 cents lower, with July at 63.34 cents a gallon.

Buying Feeder Cattle Put Options to Profit from a Fall in Feeder Cattle Prices

The price of Feeder Cattle Futures is 120.500 USD (per pound) today.

Will FC price drop / fall?

Yes. The Feeder Cattle Futures price may drop from 120.500 USD to 105.089 USD. The change will be -12.789%.

Will FC price grow / rise / go up?

Will FC price crash?

According to our analysis, this can happen.

Projecting feeder cattle prices in 2020

Let’s take a simplified approach to looking at price projections. First, the long run.

Spring 2020 projections from the Financial and Policy Research Institute (FAPRI) at the University of Missouri are now suggesting that annual slaughter cattle prices might not bottom out until the year 2020, making the current cycle a 13-year event. FAPRI also suggests annual slaughter cattle prices could average $115 per cwt in 2020, $113 in 2020 and $110 in 2020 (Figure 1).

FAPRI further suggests that the next cycle may peak sometime in the 2028 era. Drought in cow country is the biggest factor that can directly change these projections.

This is fine for a long-run perspective. Let’s now focus on a short-run perspective for feeder cattle.

Figure 2 presents my latest short-run feeder cattle price projections generated in my latest monthly price analysis. Most of the table values are devoted to feeder steer prices. Slaughter price projections are near the bottom, along with suggested slaughter cattle basis (cash minus futures). Grass steer price projections are at the bottom, and are used for budgeting going on grass and coming off grass each growing season.

The red numbers in the feeder price section are my planning prices used for going on grass in the spring and coming off grass in the fall. The bottom-line red numbers are the sell-buy margin (price off grass minus price on grass) for grass cattle, used to estimate the marketing loss on the original purchase weight.

Quick price projection update

Since you’re reading this article later than the projections were generated, you might want to do a quick update of the projected selling price for grass cattle to see how things have changed from these late-April 2020 projections.

Let’s focus on an October price for selling your grass steers off grass — the $153-per-cwt red number in the Fall ’18 column in Figure 2. When the $180 Spring ’18 price going on grass is compared with the projected $153 off-grass price in Fall ’18, the buy-sell margin is a minus $27.

This means with a 600-pound feeder going on grass at $180 per cwt and an 800-pound feeder off grass at $153 per cwt, I am projected to have a marketing loss on the original purchased 600-pound feeder of (−$27 x 6.00 cwt) equal to $162 per head. I have to make this up on the 200 pounds of gain. This figures out to a marketing loss of $81 per cwt of gain.

My projected total grazing cost of gain is $60 per cwt, including an annual grass rental charge of $90 per head, making my marketing loss plus cost of gain equal to $141 per cwt of gain. The buy-sell margin loss is even greater than the actual cost of gain. A market price of $153 and a total production cost of $141 leaves profit of only $12 per cwt of gain, or a projected $24 profit per head from running grass steers based on late-April price projections.

Let’s say on July 15 you look at Feeder Cattle futures prices and see that October Feeder Cattle futures price that day closed at $165 per cwt. Feeder Cattle futures prices are for 800-pound feeders, but you hope to market an 850-pound feeder off grass. So, how do we adjust the Feeder Cattle futures price for an 850-pound feeder in the cash market?

We can use a “basis adjuster” to generate a price adjustment for the cash market and the extra 50 pounds of weight. How I make the basic adjustment in my computer models is shown in Figure 3.

Basis is defined as cash minus futures. Each mid-month, I calculate the eastern Wyoming-western Nebraska basis (sale barn cash price minus the current Feeder Cattle futures price) for sale barn feeders from 425 pounds to 925 pounds, and my calculated last three-year average basis by feeder weight, as shown in Figure 3.

Now let’s say that on July 15, I see that Feeder Cattle futures for October closed at $165 per cwt. Now I want to adjust this futures price to project the eastern Wyoming-western Nebraska sale barn cash price for when I sell in October.

Let’s assume it has been a good grazing season, and I expect to sell 850-pound feeders off grass rather than 800-pound feeders. My calculations suggest a three-year basis average for an 850-pound feeder of a minus $2.65. So my new July 15 price forecast for an 850-pound feeder steer in October is ($165-$2.65 = $162.35), rounded to $162 per cwt. This is my updated projected sale barn price for grass cattle weighing 850 pounds.

This new price projection takes all of five minutes to get a quick updated price forecast for selling your steers off grass. Write down your projections in your pocketbook so that you can see the developing trend as you do this once a week or once a month during grazing season. This price trend is important to plant in your mind and helps you think through your current marketing program for your grass cattle.

Update fall price projections

Let’s use this same system to update my weaning price projections of $185 per cwt in Figure 2 for 550-pound steer calves off the cow in October. Let’s assume that on Sept. 1 you get the closing Feeder Cattle futures price for October for that day, and it is $140 per cwt. But, once again, you need to adjust this futures price for 800-pound steer feeders to a cash sale barn price for 550-pound steer calves.

Figure 3 suggests that the three-year basis for 550-pound feeders is $39.62. Add $39.62 to the Feeder Cattle futures price of $165 per cwt and you get a new sale barn cash price forecast of $179.62, rounded to $180 for an October steer calf price.

With this up-to-date price projection, you can start evaluating alternatives for marketing your fall-weaned calves. Should you sell at weaning, background or retain? You can use this quick pricing technique to get some planning prices for marketing alternatives for your 2020 calves.

A similar approach works even better to project slaughter cattle prices, by using Live Cattle futures and Live Cattle basis numbers, readily available on the internet from various university Extension services, such as Iowa State University and Kansas State University.

Price watching, if it is easy and applies directly to your cattle, can become addictive and is a very useful cattle marketing tool.

Words of caution: The variation of the basis adjustments is high, and as the variation of these basis numbers goes up, it reduces the quality of the projected planning prices. This implies that you should concentrate more on the price trend through the production year than on the absolute projected price levels.

Beef Industry Futures: Feeder and Live Cattle

January 12, 2020 by John Ryan | Ag Marketing

The U.S is the largest producer of grain fed beef in the world due to its abundance of pasture suitable for grazing and its large supply of feed grains. Live cattle prices have been rallying to all time high prices, presenting numerous trading opportunities. Whether one is a rancher needing risk management tools or a speculator seeking trading opportunities, cattle futures provide the liquidity and transparency necessary for market activity.

Before taking advantage of these tools, one must understand the fundamentals of the market. There are two types of cattle futures to trade when addressing beef futures: feeder cattle and live cattle. While feeder and live cattle are related contracts, each has its own characteristics that affect supply and demand. Below, I will discuss the timeline of the cattle’s life cycle along with the features of each futures contract and the factors that affect these contracts.

The First Nine Months

Ranchers will traditionally breed their cattle in the summer which will produce calves in the spring. On average, a newborn calf will weigh 70 to 90 pounds at birth. Before a calf is considered a feeder, it has already been gone through the process of being born, weaned and sent out to graze for up to nine months.

Feeder Cattle

Feeder cattle are weaned calves that have been raised to be 600-800 lbs.Once a calf reaches a minimum weight, it is sent to a feedlot with the goal of putting on weight aggressively. Traditionally, feeder cattle must be mature enough in order to go to the feedlot and be fattened prior to slaughter. The process of transforming feeder cattle to live cattle usually takes between 3 to 4 months. Once again, the feeder cattle put on weight aggressively in the feed lots to reach the desired finish weight of 1,000-1,300 lbs. Corn is the best way to quickly fatten feeder cattle; therefore, the price of corn has a direct effect on the price of feeder cattle.

Feeder cattle futures contracts:

  • Symbol: FE (open outcry), FC (electronic trading)
  • Contract size: 50,000 lbs. (of feeder cattle)
  • Specs: 649 to 800 lbs
  • Minimum tick: $0.00025 cents per pound (or $12.50 per tick)
  • Limits: $0.03 (or $1,500 per contract)
    *Feeder cattle futures are cash settled, so there is no delivery unlike the live cattle futures.
  • Months traded: Jan, Mar, Apr, May, Apr, Aug, Sep, Oct, and Nov.
    *To arrive at the value of the contract, simply multiply the price of feeder cattle times the size of the contract. For example, if feeder cattle are trading at a price of 1.46550, the total value of the contract is $73,275.00 (50,000 x 1.46550).

Live Cattle

Live cattle futures began trading in 1964 at the Chicago Mercantile Exchange (CME) as the first non-storable futures contract. Live cattle are traditionally raised in the Midwest, Southwest, and California (in the US). The term live cattle refers to cattle that have reached the necessary weight for slaughter. Traditionally, live cattle remain on the feedlot for up to 5 months (after being moved from feeder) while they put on an additional 500 lbs. Feed lots go on to sell the live cattle to meat packers that slaughter the cattle. The average slaughter weight is about 1,250 lbs. While slaughtered cattle have value from their hide and other parts, the majority of the price comes from boxed beef cutouts. Boxed beef cutouts are the major cuts that are often deboned and are packed and sealed in cardboard boxes.

Live cattle futures contracts:

  • Ticker symbol: LE (pit trading), LC (electronic trading)
  • Contract size: 40,000 lbs. (of live cattle)
  • Contract specs: 55% Choice, 45% Select, Yield Grade 3 live steers
  • Minimum tic size: $.00025 cents per pound (or $10.00 per tick)
  • Price limits: $0.03
  • Months traded: Feb, Apr, June, Aug, Oct, Dec
    *For example, to arrive at the price of live cattle futures that is trading at 1.24, multiply 1.24 times 40,000- the total value of the contract is $49,600.00.


The most important report for cattle futures is the Cattle on Feed Report. This report contains monthly totals of cattle in the feedlots that will be sent to the market, placement of cattle intended to be slaughtered, and marketings (sales). The USDA reports are also important as it reflects the inputs that are required to feed cattle. Understanding when the reports are released and what analysts to expect is pertinent when trading feeder and live cattle.

Many active traders aren’t familiar with the differences between feeder cattle and live cattle. To properly trade the feeder and live cattle futures, one must have a fundamental understanding of the beef industry. Because of the long time period from newborn calf to slaughter, the market is subject to volatility and directional moves. Knowing market fundamentals can make all the difference between timely and well-planned trades, whether one is hedging or speculating.

Livestock Futures and Options to Hedging

If you are interested in the livestock commodity futures industry but feel you could use more information to get started, then download this self-study guide to learn the fundamentals of futures trading and hedging. You will receive an incredibly detailed, step-by-step explanation of the life of a livestock futures contract, as well as what tools you will need to possibly realize your goals.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

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