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CME Meat & Livestock Futures and Options Trading

Feeder Cattle Futures Live Cattle Futures Lean Hog Futures

CME Livestock & Meat Futures & Options Trading

Lean Hog Futures Trading:

  • Most hog production occurs in the Midwest.
  • The largest hog producing states are Iowa, North Carolina, Minnesota and Illinois
  • The U.S. is the world's largest pork exporter.

Introduction to Livestock

Course Overview

The livestock complex consists of Lean Hogs, Feeder cattle, and Live Cattle. Livestock futures and options provide the tools the industry needs to manage risk and help put food on the table for a growing global population. Gain an understanding of the fundamentals that affect supply and demand in the livestock markets. Find out how futures and options provide critical price discovery and risk management roles for a variety of market participants, from farmers, processors, distributors, wholesalers, retailers, traders and more. Learn about the ways these contracts can be utilized in your portfolio.

Introduction to Livestock

Lean Hogs refers to a hog that is ready for processing at about 275 pounds. Hogs are mainly produced in the Midwest, and it typically takes about six months for a pig to become market-ready. The carcass of a market hog weighs about 200 pounds and will typically yield about 155 pounds of lean meat, which is the core of the lean hog futures contract.

Lean Hog futures allow sellers and buyers, such hog producers and packers, to manage the risk of adverse price movements in their operations. Lean Hog futures trade in units of 40,000 pounds of hog carcasses and in minimum price increments of $10.00. They are listed in February, April, May, June, July, August, October and December. As with Feeder Cattle, Lean Hog futures are settled in cash at expiration, to at a price equal to the CME Lean Hog Index on the last day of trading.

Live Cattle and Feeder Cattle Futures Trading:

There are two types of cattle traded at the CME: Live cattle and feeder cattle, so we have to differentiate the two.

Live cattle are considered cattle from the calf stage to the point when they reach about 600 to 800, which take about six to ten months. At this point, they are transferred to feedlots and they will be considered feeder cattle at this point. They remain on the feedlots for about another five months where they will put on about another 500 pounds.

Livestock Futures – Live Cattle

The seven major cattle producing states are Arizona, California, Colorado, Iowa, Kansas, Nebraska, and Texas.

Cattle are generally fed corn, Milo and even wheat if the price is cheap enough. The protein end of their diet is soybeans and roughage like hay and alfalfa.

Live Cattle futures are designed to allow feedlot operators to hedge against a decline in price before they are able to sell the cattle for processing, and for buyers, such as meat packers, to manage the risk of an increase in the price of the cattle they are planning to purchase for processing, or to protect their profit margin for beef they have committed to ship in the future.

Live Cattle futures trade in units of 40,000 pounds and in minimum price increments of $10.00. They are listed for trading in the even months of February, April, June, August, October and December. Live Cattle is a physically-delivered futures contract, meaning that live steers are ultimately delivered.

Feeder Cattle:

Feeder Cattle are weaned calves that have been raised to a weight of 600 to 800 pounds. A newborn calf averages 70 to 90 pounds when it is born, typically in the Spring. After it is born, it is weaned and allowed to graze for up to nine months in order to reach the minimum weight, at which point it is sent to a feedlot. Once in the feedlot, cattle undergo an aggressive feeding process over the next three to five months, during which they gain an additional 500 pounds to reach a weight of 1100 to 1400 pounds.

Feeder Cattle futures contracts allow participants, such as producers, to hedge a decline in price between the time calves are born and when they are sold to feedlots. It also allows feedlot operators to hedge against an increase in the price of Feeder Cattle before the operator is ready to purchase them for their lot. Feeder Cattle futures trade in units of 50,000 pounds and in minimum price increments, or ticks of $12.50. They are listed for trading in January, March, April, May, August, September, October and November.

At expiration, rather than calling for the delivery of physical cattle, Feeder Cattle futures are settled in cash at a price equal to the CME Feeder Cattle Index on the last day of trading. The CME Feeder Cattle Index is calculated by CME Group staff using data provided by the USDA. The data and formula used to calculate the final settlement price is published on the CME Group website.

After feeder cattle reach the weight range of 1100 to 1400 pounds, they are considered live cattle. This means that they have reached the minimum weight for processing, at which point feed lots will sell the live cattle to meat packers.

Additionally, weather can be a factor in cattle prices. Very hot weather can result in cattle not gaining normal weight as they tend to eat less. Also, extremely cold weather causes cattle to become stressed and burn more energy to stay warm, which means less weight gain and lower prices.

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