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Meats

Live cattle

The United States is the largest producer and consumer of beef. Just as the chicken starts with the egg, the steak starts with the cow/calf operation. This is a breeding operation that uses grazing land, cows, and a small number of bulls to produce calves. Calves spend their first six months of life with their mothers, at which time they are weaned. Some are placed in feedlots immediately, but the majority pass through an intermediate stage called backgrounding (also termed a “stocker” operation). Backgrounders place weaned cattle on summer grass, winter wheat, or some type of roughage. This phase of the calf's life might last from 6 to 10 months or until the animal reaches a desirable feedlot weight of 600 to 800 pounds. After the animals are ready to be placed in the feedlot, they are termed feeder cattle. Usually, feeding continues until the animals weigh from 1,000 to 1,300 pounds, at which time they are slaughter-ready animals. This is what the CME Live Cattle contract consists of: 40,000 pounds of slaughter-ready animals. The customer for these animals is the meat packer who buys the livestock and sells the meat and other products, such as hides. Prices are quoted two ways, either cents per pound or dollars per hundredweight (hundred pounds), which really are the same thing. A limit the price can move daily and is equal to 300 points (that's 3¢ per pound or $3 per hundred pounds) above or below the previous day's close. Variable limits come into effect after a lock-limit move.

Feeder cattle

Almost all feedlot cattle are steers (castrated males) and heifers (females who have not calved). Because some heifers are retained on ranches to replace cows that get too old, there are always more steers than heifers. Feedlots can be as small as 100 head or as large as 100,000. Some feedlots are farmer-owned, and some are commercial operations. The commercial operations (cattle hotels) account for less than 5% of all lots but 80% of all cattle marketings. The feedlot operator might buy feeder cattle for his own account, or for a fee, he might “custom feed” for farmers or other cattle owners. These feedlot-ready animals make up the CME feeder contract, which has a size of 50,000 pounds. The specifications call for approximately a 750-pound steer; therefore, the contract represents about 60 animals. Prices are quoted in either cents per pound or dollars per hundredweight. Unlike the cattle contract, the feeder contract is cash-settled, just like many of the financial futures. It is based on an Index, which the contract will equal on the last day. The Index is compiled by the USDA based on a weighted average of feeder cattle cash market sales. The feeder contract also has a 300-point limit. Like oats, some traders believe feeder cattle prices are a leading indicator of live cattle prices. They move first—hence the phrase, “Feeders are the leaders.”


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