There are four commodity contracts known just as the meats, which trade on the CME. These livestock contracts are: feeder cattle, live cattle, lean ho...
There are four commodity contracts known just as the meats,
which trade on the CME.
These livestock contracts are: feeder cattle, live cattle, lean hogs and pork bellies.
Although pork bellies has been the most publicized by the media, it's a thinly traded market with not enough liquidity, creating wide bid/ask spreads and excessive volatility. Unless you're really expert on pork bellies, stay away from this contract. Pork bellies were the first meat futures contract offered in the form of frozen meat, which is basically bacon.
The contract size of pork bellies is 40,000 pounds. Prices are quoted in cents per pound, with one hundred points in every cent. However, one tick is 2.5 points, and so is worth $10. The most active months for delivery of pork bellies are February, March, May, July and August.
Lean hogs contracts are also 40,000 pounds, and therefore are quoted the same as pork bellies. Lean hog contracts are cash settled.
The same goes for live cattle. The most active months for trading in live cattle are February, April, June, August, October and December.
However, feeder cattle contracts are 50,000 pounds. They're also quoted in cents per pound, with one tick being 2.5 points (one point being one-hundredth of a cent), and so worth $12.50. Feeder cattle contracts are settled in cash.
Live cattle refers to calves and young cattle weighing less than 600 to 800 pounds, which is about the size of a calf around six months old. When the calf reaches that age and size, it is transferred to a feedlot. Then it becomes known as feeder cattle. They are in the lot to be fattened up.
The meats contracts have low margins. Also, they can have large price movements. They have locked limit up and limit down in the same day -- you're not allowed any more volatility than that.
They're quite sensitive to the information released in reports from the United States Department of Agriculture.
The meats are quoted in a way that can be confusing, because the decimal is not in the usual place. A price quote of 94.75 looks like $94.75 but it really means $0.9475. The 75 means seventy-five one-hundreds of a cent (or points).
These meat contract prices tend to be related to grain prices, because cattle and pigs are fed corn and other grains, so meat must be more expensive if the grains required to feed the cattle and pigs goes up in price.
Demand varies depending on people's appetite for beef and pork. Outbreaks of mad cow disease can adversely impact demand for beef. Many countries stop importing American beef when it's found.
