Unlock the Power of Wisdom Online!

Is Spread Trading Right for You?

This complimentary Intro to Spread Trading guide, offered through RJO Futures, provides valuable information on spread trading -- including its mechanics, types of spreads, how to chart spreads, and much more.

Get your copy!

The cattle market has generally been ignored in recent commodity market headlines. Cattle futures come in two types: Live and Feeders. Live cattle futures are based on cattle weighing between 900 pounds and 1,400 pounds, ready for slaughter after being a fed a diet of corn and grains in a feedlot. Feeder cattle futures -- sometimes called "thins" -- are cattle weighing between 600 pounds and 800 pounds, about to enter a feedlot to be fattened up to "Live" weight.

Calving generally occurs in the spring. And when the calves approach Feeder weight (typically 6 months to 10 months later), they are sent ("Placed") onto a feedlot. The Feeders are then fattened up over the next 4 months to 9 months, and then sold ("Marketed") to slaughterhouses for public consumption.

In the U.S., the most active placement period for Feeder Cattle is between August and November. These placed cattle are usually marketed between May and August. Although it is difficult to think of cattle as a "crop," the placement/marketing cycle of Live cattle futures pricing creates similar patterns to that of the planting/harvest cycle in the grains.

RECENT CATTLE MARKETING AND PLACEMENT TRENDS

If you cannot view the US Cattle on Feed charts, go here.
Source: www.nass.usda.gov

Take advantage of the placement/marketing cycle. An old adage among livestock futures traders is that "you not only have to be right on direction, but also the right contract," meaning that different contract months tend to behave very differently. This can readily be seen in the behavior of the October (LCV8) and August (LCQ8) contracts in the coming weeks.

If you cannot view the Livestock Chart, go here.
Chart created with Track 'n Trade Pro V5.0

According to our research, the Live cattle futures have generally followed placement/marketing cycle by favoring October Live cattle futures, relative to August Live cattle futures in the coming weeks. Although past performance is in no way an assurance of future performance, it is interesting to note that October Live cattle futures have gained an average of +0.525 cents/pound ($210 before commissions and fees) from mid June through early July, in 13 of the last 15 years since 1993. Adverse movements -- or periods when August gains relative to October -- have tended to be mild, making this "spread position" look attractive to us currently.

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.

Scott Barrie owns Commodity Futures and Equity Analytics ( www.commodityalmanac.com) and is the former head of research and operations for Great Pacific Trading Company in Oregon, an educational brokerage specializing in introducing newcomers to speculating in the futures and options markets.

He has 12 years experience in the financial derivatives industry, including time as a trader and hedge specialist. He is a regular contributor to Stocks & Commodities magazine and Stock Trader's Almanac, and has been quoted in The Wall Street Journal, Investors Business Daily, and Barron's.

Is Spread Trading Right for You?

This complimentary Intro to Spread Trading guide, offered through RJO Futures, provides valuable information on spread trading -- including its mechanics, types of spreads, how to chart spreads, and much more.

Get your copy!