Cattle and Corn: An Obscure Spread With Interesting Numbers
An interesting spread here. I’ve traded this one on and off over the years. It’s a long-term hold and some years this spread just has a nice smooth trend.
Think of this spread as a cost of carry, in a way. Or perhaps: wholesale versus retail is a better way to look at it.
Feeder Cattle (young moo cows) + Corn (food) + time equals Live Cattle (grown up ones).
It’s like that math parents do when say “do you realize how much it costs to have a teenager and send him/her to college?”
In futures we can trade that, for cattle and corn at least. We can see where base cost of production is over or undervalued and with a bit of patience, these kinds of trend trades reveal themselves.
This one has a great seasonal pattern. That is, it tends to repeat itself each year. Not every year, but most years. Research says selling Feeders and Corn and buying live Cattle can be quite profitable. On average, an entry late April and exit late Sep has been profitable every year since 2005.
From 2006 onwards: 100% strike rate, average profit $3374 for one spread.
Formula:
(+2*400*Live Cattle) – (1*50* Corn) – (1*500 * Feeders)
Essentially it says one contracts of feeders (50000lbs) plus one of corn (5000 bushels) makes about two live cattle (80000lbs).
Some also trade a 1 Corn: 2 Feeders and 4 Live Cattle. Its’ essentially halving the corn requirement from above.
Remember, there are no rules in spread trading. Our job is to find the correlations and trade them.
Risk:
Hmmm, there are two ways to look at that. The stats say the worst drawdown in the last 15yrs in $5400 and that is about double of most other years in that time. So it’s not a small risk trade.
The other way is to eyeball a chart. That recent move from +2000 to 0 did not take long at all. Unless get a well-timed entry, then stops will have to be wide - a few thousand at least (about 3.3 times ATR). It’s one where you would start with a wide stop and bring it in should you see some equity.
Entries and exit need finesse since it’s not an exchange traded spread. Experienced spreaders only, with knowledge of seasonality. In you are new to these kinds of spreads, mark it down as market knowledge and come back for a look later on.
Think of this spread as a cost of carry, in a way. Or perhaps: wholesale versus retail is a better way to look at it.
Feeder Cattle (young moo cows) + Corn (food) + time equals Live Cattle (grown up ones).
It’s like that math parents do when say “do you realize how much it costs to have a teenager and send him/her to college?”
In futures we can trade that, for cattle and corn at least. We can see where base cost of production is over or undervalued and with a bit of patience, these kinds of trend trades reveal themselves.
This one has a great seasonal pattern. That is, it tends to repeat itself each year. Not every year, but most years. Research says selling Feeders and Corn and buying live Cattle can be quite profitable. On average, an entry late April and exit late Sep has been profitable every year since 2005.
From 2006 onwards: 100% strike rate, average profit $3374 for one spread.
Formula:
(+2*400*Live Cattle) – (1*50* Corn) – (1*500 * Feeders)
Essentially it says one contracts of feeders (50000lbs) plus one of corn (5000 bushels) makes about two live cattle (80000lbs).
Some also trade a 1 Corn: 2 Feeders and 4 Live Cattle. Its’ essentially halving the corn requirement from above.
Remember, there are no rules in spread trading. Our job is to find the correlations and trade them.
Risk:
Hmmm, there are two ways to look at that. The stats say the worst drawdown in the last 15yrs in $5400 and that is about double of most other years in that time. So it’s not a small risk trade.
The other way is to eyeball a chart. That recent move from +2000 to 0 did not take long at all. Unless get a well-timed entry, then stops will have to be wide - a few thousand at least (about 3.3 times ATR). It’s one where you would start with a wide stop and bring it in should you see some equity.
Entries and exit need finesse since it’s not an exchange traded spread. Experienced spreaders only, with knowledge of seasonality. In you are new to these kinds of spreads, mark it down as market knowledge and come back for a look later on.