Though there is no longer an active U.S. futures contract for chicken, this is the industry powerhouse. Although most traders will not need to have a full working knowledge of chicken fundamentals, it is important to know the general trends of both production and prices and how they can affect cattle and hogs. The story into 2014 is increased production because of lower feed costs (see “Meat breakdown,” below). This will help temper some of the shortfall in beef production expected next year.
Almost as popular as outright trades in individual contracts are spreads. Spread trades involve two opposing positions in related contracts or different months of the same contract.
Popular spreads play off seasonal supply changes. For hogs, we are heading into the period with heavy supplies, so many traders sell the winter contracts and buy the spring. Cattle traders often buy the period with tight supplies, such as December and February, and sell the June against it. Another trade to consider, as cattle and hogs are entering opposite supply periods into winter, is simply to buy the cattle and sell the hogs.
Rich Nelson is the chief strategist for Allendale Inc. He has more than 15 years of experience as an analyst and broker covering agricultural futures. His daily analysis can be accessed at www.allendale-inc.com.