Feeder Cattle Futures: Pricing Young Cattle

Key Takeaways

• Feeder cattle futures trade on the CME in 50,000 pound lots and settle in cash, not by delivery.
• Settlement is based on the CME Feeder Cattle Index, an average of cash market prices.
• Feeder prices and corn prices move in opposite directions, since cheap feed raises what feeders are worth.
• The cattle crush links feeder cattle to corn and live cattle as a single feeding margin.

What It Is

The feeder cattle futures contract trades on CME Group under the symbol GF. Each contract covers 50,000 pounds of feeder steers, the young cattle that weigh roughly 650 to 850 pounds before entering a feedlot. Unlike live cattle, the contract is cash settled, so no animals change hands on the exchange.

Prices are quoted in U.S. cents per pound. The minimum price move is 0.025 cents per pound, which equals 12.50 dollars per contract on the 50,000 pound size. The contract lists eight months: January, March, April, May, August, September, October, and November.

The Intuition

A feedlot operator and a rancher face opposite risks on the price of young cattle. The rancher who raises calves wants to lock a selling price before the animals are ready. The feedlot that buys them wants to lock a buying price before placement. Feeder cattle futures let both sides fix the number in advance.

The contract settles in cash because delivering a precise weight of live young animals to a single point is impractical. Instead, the final settlement uses the CME Feeder Cattle Index, a weighted average of actual cash sales. That ties the futures price to the real market without requiring physical delivery.

How Feeder Cattle Futures CME Work

At expiration the contract is marked to the Feeder Cattle Index on the last trading day, and any open positions settle in cash against that value. Before expiration the price floats with expectations about feeder supply and the cost of feeding.

The single biggest swing factor is corn. Feeder cattle are the input to a feeding process that turns them into finished live cattle, and corn is the main feed. When corn is cheap, feeding is profitable, so feedlots will pay more for young cattle, and feeder prices rise. When corn is expensive, the opposite happens.

Crush margin = (live cattle revenue) - (feeder cattle cost) - (corn cost)

This inverse link between feeder prices and corn prices is why traders rarely look at feeder cattle alone. They watch the cattle crush, which combines feeder cattle, corn, and live cattle into one margin. USDA Cattle on Feed data also matters, since placements show how many feeders are flowing into feedlots.

Worked Example

Suppose the front month feeder cattle contract trades at 250 cents per pound. One contract is 50,000 pounds, so its notional value is:

250 cents x 50,000 lb = 12,500,000 cents = 125,000 dollars

Now consider a feedlot that plans to buy 150,000 pounds of feeder cattle in two months, which is 3 contracts. To lock the price, the feedlot buys 3 contracts. If the market rises 8 cents per pound before the cattle are bought, the long futures position gains:

8 cents x 50,000 lb x 3 contracts = 1,200,000 cents = 12,000 dollars

That gain offsets most of the higher cash price the feedlot now pays. Because the contract is cash settled, the feedlot simply closes the position and buys the actual cattle locally.

Common Mistakes

1. Forgetting the corn link. Feeder prices move inversely with corn. A jump in feed cost lowers what feedlots will pay for young cattle.

2. Expecting physical delivery. Feeder cattle is cash settled to an index. There is no warehouse receipt or animal delivery to manage.

3. Ignoring the cattle crush. Feeder cattle is one leg of a three part margin with corn and live cattle. Trading it alone misses the full picture.

4. Misjudging the index basis. Local cash prices can differ from the national index used at settlement, so a hedge may not be perfect.

5. Overlooking herd cycles. Cattle take years to raise, so a shrinking herd can keep feeder supply tight and prices firm across multiple seasons.

Frequently Asked Questions

What are feeder cattle futures CME in simple terms? They are standardized contracts to buy or sell 50,000 pounds of young cattle at a set price. Feeder cattle futures CME settle in cash against an index of actual cattle sales.

How do feeder cattle futures affect investment decisions? Ranchers and feedlots use them to hedge the price of young cattle, while traders use them to take a view on feeder supply and feed costs. A price move changes the value of cattle anyone plans to buy or sell.

What is a real-world example of feeder cattle futures moving? A sharp drop in corn prices typically lifts feeder cattle futures, because cheaper feed makes feeding more profitable and feedlots will pay more for young animals.

How can investors use feeder cattle futures effectively? Track corn prices and the cattle crush margin, and watch USDA placement data for shifts in feeder supply. Because settlement is cash to an index, focus on the index basis rather than delivery logistics.

How is feeder cattle different from live cattle futures? Feeder cattle are young animals headed to feedlots and settle in cash against an index, while live cattle are finished animals ready for slaughter and settle by physical delivery. One is the input and the other the output of feeding.

Sources

1. CME Group. "Feeder Cattle Futures Contract Specs." https://www.cmegroup.com/markets/agriculture/livestock/feeder-cattle.contractSpecs.html
2. CME Group. "The Livestock Overview." https://www.cmegroup.com/education/courses/understanding-livestock-markets/the-livestock-overview
3. USDA NASS. "Cattle on Feed." https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Cattle_On_Feed/index.php
4. CME Group. "An Introduction to Cattle Feeding Spreads." https://www.cmegroup.com/trading/agricultural/files/AC-378_CattleFeedingWhitePaper_r2.pdf

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.