April Was A Historic Month for Cattle Futures

There’s more interest than ever in trading cattle. On May 2, open positions in CME Group’s live cattle futures contract stood at a record 431,718. It was the eighth consecutive record day for a contract that launched in 1964. In fact, the top ten all-time open interest days came in April.  A few factors combined to give the market its most active trading month ever.

The Economics

Cattle herds in the United States are expanding. The expansion began in late 2013 into 2014 and, depending on what USDA Cattle on Feed reports say over 2017, this period will be the longest expansion of the cattle herd since the 1990’s. At the same time, the U.S. hog herd and poultry production are also increasing, adding to the available meat supplies for the U.S. consumer. As we entered 2017, expectations were for a near record meat production for the year and this kept buyers of beef and pork, restaurants or grocery stores, on a hand to mouth basis by buying only what they need for immediate supplies expecting prices to move lower as the year progresses.

Why Now?

All of this might suggest that prices are trending down. But both live and feeder cattle have seen prices move upward, with live cattle up more than 20 percent since the start of the year. Why is this, and who’s trading?

For starters,  export markets have been robust to start the year with increased exports to Asia, Canada and Mexico that surprised the marketplace. U.S. beef exports overall were up 20 percent through the first two months of the year. Australia, which is a major competitor for U.S. beef in Asia, is in the process of rebuilding their herds, which has kept their beef production reduced from the past several years and allowed U.S. beef to be price competitive on the world stage. As prices began to rally, managed money buying increased. Trading from commodity index investors increased as well when indexes added to their livestock holdings to start the year. As these prices moved higher, producers began to hedge their production at breakeven to positive margins. We now have one of the largest commercial hedge positions since the large rally of 2014. These factors contributed to the large open interest increase and all-time record levels from this week in both Live Cattle and Feeder Cattle.

What’s Next?

A major factor through the remainder of the year will be if U.S. exports remain strong, and watching whether a deal with China to end their ban on U.S. beef might actually happen. Feeder cattle placements indicate that supplies of cattle will increase into the summer but producers continue to do a stellar job of marketing cattle early and thus pulling supplies forward, easing that impact of increasing supplies. Domestically, grilling season is approaching and if early signs are an indication, demand for beef could remain high.

Tony Drake is senior director of agricultural products at CME Group.

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