What’s Your Beef? Choosing the Right Cattle Future
The billions and billions of Hamburgers served by the McDonald’s burger
empire, the millions of steaks that will be grilled during the upcoming July
4th celebration and the various forms of beef found in your local supermarket
all have one thing in common: it was all once part of a live cow.
Beef is a staple of the American diet and a commodity that savvy traders can
use to profit. Beef in the form of live cattle futures has been actively traded
on the CME since 1964.
Cattle is broken into two forms for trading purposes, Feeder Cattle and Live
Feeder Cattle are the young cows in feed yards being fattened up in preparation
for slaughter. Feeder Cattle Futures are a derivative of Live Cattle Futures
which are the focus of this article.
Let’s first go over the basic facts about Live Cattle Futures then talk
about why right now appears to be a good time for traders to take a look at
this often overlooked commodity.
Live Cattle Futures are traded on the CME in units of 40,000 pounds with the
symbol LE on GLOBEX and LC ticker. The futures are listed in the 9-month even
cycle of February, April, June, August, October, and December. The minimum price
move or contract tick is .00025/pound or $10.00 per contract. The CME imposes
a daily price limit of .030/pound or $1200.00/contract governed by exchange
rule 1502A. The price limits are the same on the floor and GLOBEX trading. Here
is a snapshot of the trading book for Live Cattle from the CME:
Cattle feed on grains primarily. Therefore, there is a direct correlation between
grain prices and cattle prices. The higher grain prices go, the higher cattle
prices will follow.
As you can see from the chart, Live Cattle Futures hit a high earlier in the
month, right when the RSI moved into overbought territory.
Price has pulled back off of this high, and appears to be consolidating here
above the 18-period Simple Moving Average. Price has been in a strong uptrend
since April 1st, 2008 and buying each pull back has proven to be an effective
strategy from April to today. Price is now in a pullback and savvy traders may
want to seriously consider going long Live Cattle Futures soon.
David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.