By Noble Drakoln

Cattle have roamed the earth for thousands of years, and "modern" cattle raising can be traced back at least 8,500 years ago in Europe and the Middle East. Found all over the world, cattle are used for milk, leather, meat and labor, and have been revered throughout history in art, the zodiac and in various religions. In the U.S., cattle were brought over by European settlers.

Originally imported into the U.S. in 1623, cattle breeds have been introduced continuously in order to improve the cattle industry. With the ultimate goal of finding cattle that matured faster, produced more milk and provided a better quality of leather, the majority of cattle in the U.S. are the result of various cross breeding experiments.

In 1964, the Chicago Mercantile Exchange (CME) introduced the first futures contract on a live animal, thereby allowing meat buyers and suppliers to diminish their exposure to the seasonal risk that live cattle trading creates. (Find out how to trade these hog-wild commodities, in Learn To Corral The Meat Markets.)

A sample commodity futures contract for live cattle is shown in the following table.

Live Cattle Contract Specifications
Ticker Symbol Open Outcry: LC (CME)
Electronic: LE (Globex)
Contract Size 40,000 pounds
Deliverable Grades Each futures contract shall be for 55% choice, 45% select, yield grade 3 live steers, as defined by the United States Department of Agriculture (USDA) "Official United States Standards for Grades of Slaughter Cattle," or producing 55% choice, 45% select, yield grade 3 steer carcasses, as defined by "official United States Standards for Grades of Carcass Beef."
Contract Months Feb, April, June, Aug, Oct, Dec
Trading Hours CME Open Outcry: Monday-Friday
eCBOT Electronic: Sunday-Friday
Last Trading Day Last business day of the contract month
Last Delivery Day Up to seven business days of the month following the end of the contract month.
Price Quote Dollars and cents per pound
Tick Size 1 point = 1 cent per hundred pounds = $4
Daily Price Limit
(Not applicable in electronic markets)
There shall be no trading at a price more than 3 cents per pound above or below the previous day\'s settlement price.

Understanding Live Cattle Contracts
Like every commodity, live cattle has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a live cattle futures contract, you will see a ticker tape handle that looks like this:

LC8Q @ 91.80

This is just like saying "Live Cattle (LC) 2008 (8) August (Q) at $91.80 per hundred pounds (91.80)." A trader buys or sells a live cattle contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the live cattle contract equals the equivalent of 40,000 pounds or 400 hundred pounds multiplied by our hypothetical price of $91.80, as in:

$91.80 x 400 hundred pounds = $36,720

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a live cattle contract on NYMEX requires a margin of $1,080, which is approximately 3% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a live cattle contract, a 1-cent move is equal to $4. When determining CME's live cattle profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $4. For example, if prices move from $91.80 to $92, you multiply the difference, which is 20 cents, by $4 to yield a contract value change of $80.

- Buy Sell Total Value
Live Cattle Contract Price
(0.01 cent move = $4)
$91.80 $92.00
0.20 cents or $80

Live Cattle Exchanges
The futures contract for live cattle is traded on the Chicago Mercantile Exchange (CME) and Brazilian Mercantile and Futures Exchange (BMF).

Facts About Production
Calves require a nine-month gestation period, and typically weigh between 55 and 100 pounds at birth. They can grow to as much as 1,900 pounds, with a natural lifespan of approximately 15 years.

The world has about 1.3 billion head of cattle. India has 400 million head of cattle, Brazil and China share a combined 300 million head of cattle, Africa has about 200 million head of cattle and the U.S. has 100 million head. Of these five nations, the U.S. produces 25% of the world's beef, which is a tremendous feat considering that the country only represents 10% of the world's cattle. (Take a look at a study that discovered that three out of every four options expired worthless - Do Option Sellers Have a Trading Edge?)

Factors That Influence Live Cattle Prices
The price of live cattle is influenced by the following factors:
  • Rearing cattle is harmful to the environment. According to the United Nations, cattle farming contributes at least 18% of greenhouse gas emissions. The primary pollutant is methane, which is largely produced by the digestive systems of cattle and considered to be worse than carbon dioxide because its warming effect is at least 23 times greater.
  • Bovine spongiform encephalopathy (BSE), also known as mad cow disease, periodically impacts the live cattle industry. Outbreaks have led countries to ban imports and exports from various countries around the world, and have resulted in the mass destruction of thousands of livestock in order to reduce potential disease spreading. A 2004 discovery of BSE in cattle from Texas directly led Japan, the largest importer of U.S. beef, to shut its doors. Eventually Japan eased the ban, but placed heavy restrictions on imports.
  • Although the U.S. represents 25% of the world's beef production, it is still considered a net importer of beef. The imported beef is primarily used as ground beef. This leaves the import industry sensitive to any changes in dietary habits that involve reducing or eliminating products that contain ground beef.
Conclusion
The cattle industry has yet to be fully tapped. The fact that the U.S. represents one-quarter of the world's beef production with only 10% of its inventory leaves the field wide open for competitors. China has yet to tap its resources. Brazil, along with its neighboring countries, was able to expand its beef industry when Japan banned U.S. cattle. Needless to say, the cattle industry has not yet reached its full potential.


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