# Cash cattle vs futures prices



## CattleLearner (May 25, 2017)

Hi everyone,

Was hoping someone can help. I'm doing an economics assignment and decided on US cattle, decided to pick this subject because I live in Hong Kong which is in Southern China, and China just opened up its market to US beef. One thing I noticed is that cash cattle prices are way higher than futures. Why is this? Shouldn't the prices converge especially in the June contract which is almost at expiration? Like someone could buy the futures and sell the cattle in the cash market to make the difference?

Also in a tight market like this and with feed prices so low is it more beneficial to buy feeder cattle rather than live cattle?

Do you guys expect prices to keep going up because of China or just demand in the domestic market?

Any help will be appreciated because I don't come from a farming background.

Thanks!


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## Tim/South (Dec 12, 2011)

Welcome to HayTalk CattleLearner.

Future prices are speculation. They are what investors use as a guide to try and keep from losing money. Generally they are softer than the actual cash market. You are correct in thinking the cash and future prices should be on the same page.

The truth is no one can predict the "future". Politics, weather or a market scare (Brazilian beef scandal/ Mad Cow) can change the market for better or worse with no warning.

Futures want to use historical statistics and current speculation as a guide.

How much beef was sold/consumed this week last year?

How many head of cattle were processed this week last year?

How many head of cattle were in the feedlots this time last year?

How many heifers are retained for breeding compared to last year?

Will U.S. exports increase because Brazil got caught doing what we have known they were doing?

How many acres of corn were planted this year compared to last year?

How much rainfall do we have compared to last year or normal years?

Will a weak U.S. dollar make for better export pricing?

In my humble opinion, futures are a tool to keep the prices paid to the producer as low as possible. This creates less of a gamble for the meat packers and retail stores. Buy from the cattle owners as cheap as possible, package and sell for as much as possible.

As a cattle producer I am glad China and the U.S. have agreed to resume the beef trade. It is a visible, positive sign for the beef market in general. I am not certain of how much of an increase in exported beef there will actually be. We have been shipping beef indirectly to China for years through Vietnam (and Hong Kong). Just went through the back door to get it there.


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## CattleLearner (May 25, 2017)

Great, thanks very much for taking the time to give me a detailed reply! I'll go look up some of the other points you mentioned.


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## kurt1981 (Apr 18, 2017)

The cash-settled commodity index is a mathematical calculation that averages the head counts, weights and prices of a commodity to determine its settlement price. Here you will find daily price data for CME Indexes on Feeder Cattle (posted in the afternoon with a lag of 1 business day), Lean Hogs (posted in the morning with a lag of 2 business days) and Pork Cutout (posted in the morning with a lag of 1 business day). "CME website." If there is a bull rally it takes a while for the actual cash index to catch up. (Like news of a unexpected snow storm or new export) Just because someone is buying a 700 lb steer for 1.55 at an auction when fc are 1.42 cash index doesnt mean anything but good news for traders who are bullish. The cash index will catch up overtime the rallies from bullish news hold true. IF not futures will trade back down to the cash index as each month expires. In my opinion.


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## rjmoses (Apr 4, 2010)

The futures market was originally designed such both the buyer and seller could lock in a price for future sale or purchase of a commodity with speculators absorbing swings in prices both ways.

A seller (producer) offers to deliver a commodity, such as corn or live cattle at guaranteed quality for an assured price, thus "guaranteeing the producer a fixed price. Simple example: It costs me $3 to produce a bushel of corn and I contract to deliver 5,000 bushels to a fixed delivery point at a certain moisture content, test weight, foreign matter content, etc. by a certain date (e.g. December) for $3.50/bushel. I am now guaranteed a "profit" of $.50/bushel or $2,500 for the contract.

Likewise, a consumer agrees to buy a fix amount at a certain quality level to be picked up at a specific location by a specified date. On the buyer's side example: Kellog's needs 5,000 bushels of corn for their corn flakes in December. Kellog's contracts to buy this corn at $3.50 and take delivery in December. They are now guaranteed that their raw materials cost will be $3.50/bushel.

Now, speculators step in and bet that the corn market will go up or down. Since it's a zero sum game, the spec absorbs the risk of price change. If a spec thinks corn will go to $4, he will take the other side of my contract, hoping to make the $.50.

Likewise, another spec will take the "sell" side of the Kellog's contract, betting that corn will go down to a lower price, e.g., $3.25, hoping make $.25 by being able to deliver corn to Kellog's that cost him $3.25, but Kellog's will be paying $3.50.

Over 90% of all futures contracts are liquidated, i.e., never go for delivery.

Now, as a smart farmer (I wonder if I am?), I know that I expect to produce somewhere around 200,000 bushels, but I know my low limit of production could be 150,000 bushels. So I contract for future delivery 150,000 bushels. (I don't want to have to buy corn from someone else at maybe a very high price ($7/bushel)to meet my delivery contract requirements.

But I may produce more corn than I sold, so I use the cash market to sell balance, taking the risk that maybe corn will drop in price, or benefiting from a price increase should there be a shortage.

Simple demo: It's May, I planted 1,000 acres of corn on fields that historically have produced 175,000 to 210,000 bushels. My input cost (seed, fuel, labor, fertilizer, etc.) will run about $3/bushels if I get 180,00 bushels yield. So I contract to sell 150,000 bushels (30 contracts) for delivery to the Chicago terminal by December (Dec contract) at $3.50.

September comes and I harvest 179,000 bushels. I may put the excess 29,000 in storage or sell it at the time of harvest, depending on what I guess the future will be in corn prices. I have locked in my profit on the majority of my production, but am absorbing the risk on the 29,000 bushels of excess production.

Putting it simply: Commodities trading is "Buying something you don't want or selling something you don't have."

Hope this simple explanation helps.

Ralph


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