Grilling Season In The U.S.- Cattle and Hogs Seasonal Meats
Memorial Day weekend in the United States is the official start of the summer season. Summer is synonymous with vacation time. School ends for many students around the nation and many workers take a break from their daily grinds during the summer months. The summer season runs through the Labor Day weekend at the beginning of September.
Seasonality in Commodities
In the world of commodities, seasonality is an important concept. The time of the year has significant ramifications for the fundamental supply and demand equation for many raw material markets. For example, since summer is the vacation season, people tend to do more driving during the months of June through August in the U.S. Therefore, gasoline demand tends to rise during what is “driving season” or the period of peak demand for the oil product that powers automobiles. People also tend to schedule travel by air during the summer, so jet fuel demand, as well as gasoline demand, increases during the hot months of summer.
Another example of rising demand for a commodity during summer months comes from electricity. Warm or hot temperatures mean that air conditioners work overtime making summer the season of peak demand for electricity.
Perhaps the most ubiquitous American tradition of the season is the barbecue. Family and friends gather when the sun is shining, the weather is warm and enjoy the outdoors. Food is always an important component of these gatherings, and the grill is often the centerpiece of an event. The staples of the grilling season are the all-American foods of burgers, and hot dogs cut steak, chicken, ribs, sausage and other animal proteins round out the typical summer menu all over the nation. Memorial Day marks the start of grilling season in the U.S. and the period of peak demand for meats.
Cattle and Hogs in Grilling Season
The American tradition means that producers of cattle and hogs must organize themselves to satisfy increased demand for their products during the height of grilling season. Therefore, there is a seasonal pattern of strength in the cattle and lean hog markets which tend to exhibit price strength as grilling season approaches each year.
The three top futures contracts in the world of animal protein are the live cattle, feeder cattle and lean hog futures. All trade on the Chicago Mercantile Exchange (CME) and offer both futures and options on futures contracts. While the live cattle and lean hog contracts have a delivery mechanism, the feeder cattle contracts are financially settled. The delivery device allows buyers to receive delivery of the commodity and sellers to make delivery of the product during the delivery period for each contract.
The delivery mechanism allows for a smooth convergence of futures and real physical prices. In the world of commodities, the physical product is at the top of the pyramid and all derivative instruments seek to replicate the price action in the physical. Futures contracts with a delivery mechanism do the best job replicating physical market pricing as they essentially become physical commodities during the delivery period.
The CME provides detailed delivery specifications for the live cattle and lean hog futures contracts. These specifications are created with the consultation of the industry so that the contracts are efficient and effective hedging tools. A producer who sells futures contracts can make delivery and a consumer who buys futures contracts can eventually stand for and take delivery of the physical cattle or hogs.
As with all other commodity markets, meat futures trade for nearby and deferred settlement periods. The price action of intra-commodity spreads in meats can often be more volatile than outright, nearby prices. These intra-commodity, calendar, time or front to back spreads are often an excellent way to understand and monitor the current supply and demand characteristics of the meat markets. When nearby futures prices are higher than deferred prices, a condition of backwardation exists. Backwardation often tells us that nearby demand is higher than current supplies or that a deficit in the market exists, generally a positive sign for short-term pricing.
When nearby futures prices are lower than deferred prices, a condition of contango exists. Contango is a sign of oversupply or a glut market where nearby supply exceed nearby demand.
Meat futures tend to become more volatile as grilling season approaches each year. However, many other factors influence the price of cattle and hog futures. For example, grain prices can impact meats as the animals consume tremendous amounts of feed during their lifetimes. Animal diseases can also affect the prices of meats as can the value of the dollar given the export market for animal proteins.
Grilling season is all about demand, think of that the next time you fire up that grill and slap those burgers, dogs, steaks, ribs and sausage on your grill. Chances are at some point those meats traded on the CME futures contracts. Producers and consumers hedge meats and speculators position for profit during the lifetimes of these animals that eventually undergo processing and wind up on our grills during the height of the season.