In free market economies, supply and demand is the
primary enabler for price movement. Any outside forces that affect supply and demand eventually affect prices. When you are
considering a trade in the feeder cattle market some of the basic fundamentals that you should consider are:
1. Feed Corn is widely used in livestock feed so feeder cattle prices are negatively correlated to corn prices. When corn
prices go up feeder cattle prices go down, and when corn prices go down cattle prices go up. However, distillers' grain is
starting to displace corn so the correlation is not as close as it once was.
2. Weather Weather can
be a major factor in cattle prices. Hot weather can usually results in cattle not gaining normal weight as they tend to eat
less. Extremely hot weather can result in significant death loss of calves, yearlings, and finished cattle. Also, extremely
cold weather causes cattle to become stressed and burn more energy to stay warm, which means less weight gain. Less weight
gain equal less meat and lower prices.
Disease Bovine spongiform encephalopathy (BSE)
also know as mad cow disease was first identified in 1986. The number of animals infected has been small and isolated, but
the publicity about even one case can send prices sharply lower because of worries about the effect on domestic consumption
and import restrictions imposed by other nations.
4. USDA Reports The most important
report for cattle futures is The Cattle on Feed Report. This report contains the monthly total number of cattle and calves
on feed, placements and marketings.
5. Economy Beef demand and cattle prices are directly impact
by consumers’ incomes. The current financial crisis may reduce those incomes and therefore cattle prices. The last two
recessions in the U.S. were very mild. This recession may be more severe, more like the recessions of 1974 and 1975 and again
in 1981 and 1982 when real GDP dropped near three percent. A drop of that magnitude this time could have a $4.50 to $5.00
per hundredweight negative impact on feeder cattle prices, not as much as prices have already dropped.
These are just some of the basic fundamentals to keep in mind when you
are considering a trade in the feeder cattle market. Therefore, before opening up a commodity account to trade feeder cattle
you should consult with a licensed commodity broker that follows the feeder cattle market to discuss investment strategies.