Livestock Fundamentals

As with all commodities, the livestock industry faces a variety of market dynamics that impact the value of cattle and hogs. Since cattle and hogs cannot be stored like grain, they must be brought to market on a timely basis, with their prices influenced by many economic factors along the way.

The number of available live animals, changing consumer demand and even weather patterns can impact price movement during those time periods.

The key fundamentals that impact the livestock market include;

• Production
• Supply and demand
• Livestock cycle
• Seasonality. 

The Production Cycle

The production cycle, a view into the animals that will be available at a specific time, is often projected using the pipeline approach, which estimates the quantity from the time livestock enters the production pipeline at birth, until it terminates in the supermarket.

By using data from the USDA on litter sizes, current inventory, imports and exports and commercial production, participants can get insights into the quantities of cattle and hogs that will be marketed and the subsequent impact on prices. 

Supply Factors

There are many factors that influence livestock supply, including market changes, cost of inputs, weather and price of substitute goods. Change in market price can cause a short-term change in quantity; as prices increase, a farmer may move to bring more animals to market to capitalize on advantageous pricing. A change in the price of inputs, especially animal feed, may influence supply. When facing higher prices for corn and soybeans, producers may reduce the amount of time that animals are on feed to alleviate some of the impact of higher grain prices. Enhancements in technology can improve reproduction or increase the yield of lean meat.

Severe weather or disease can have an immediate impact, causing supply disruptions or an eventual drop in production. Very wet, cold winters can slow cattle weight gains and in the extreme, potentially cause death loss. Poor weather conditions can also impede the movement of both hogs and cattle across the country.

Changes in the price of substitute goods can also influence supply. Since beef can be considered a substitute for pork and vice versa, a decrease in the price of one may trigger an increase in the supply of the other due to consumers moving to the cheaper alternative.

Fluctuations in the prices of joint products that are derived from livestock will also have an impact on supply. For example, an increase in the price of beef spareribs could potentially lead to an increase in the supply of beef, as more animals are brought to market to capitalize on the advantageous pricing.

Finally, institutional factors, such as government programs and interest rates, can also impact production decisions and supply.

Demand Factors

As with supply there are factors that affect the demand for livestock, often related to consumer behavior and decisions. Changes in population size, distribution and income, will impact the demand for protein from meat. The price of substitute or complementary products will also influence the demand for meat; for example, if the price of poultry declines relative to beef and pork, consumers may turn to chicken.

Finally, constantly changing consumer preferences, which can be inspired by age, exposure to new types of foods, or even advertising, will also impact the demand for livestock. This includes the attitude that consumers in other countries may have regarding U.S. beef and pork, which will affect livestock exports. If there are concerns about the price or quality of U.S. meat products, there will be less demand for imported U.S. meat as consumers turn to other sources.

As you can see, there are many market fundamentals that have an impact on livestock prices.  A basic understanding of what drives these factors is key to developing a successful hedging or trading strategy.

CME Group Livestock futures and options offer a variety of tools to help meet risk management and trading needs.