Cattle Crush Spread
Yesterday the August-April-May 6:3:2 cattle crush spread closed above the declining 30-day Moving Average for the first time in over two months. This signaled a bullish trend change and a reentry signal for the blog.
The spread closed at -$10,860 (premium the sum of the feeders and corn) on October 27th. Therefore, the blog hypothetically purchased six 40,000 lb. August 2015 live cattle contracts at 153.60 (total value of $368,640), sold three 50,000 lb. April 2015 feeder contracts at 227.30 (total value of $340,950), and sold two 5,000 bushel May 2015 corn contracts at $3.85 1/2 (total value of $38,550). Initially, the exit strategy is to liquidate the spread on a two-consecutive day close below -$20,750 (just over $500 below the current contract low).
The first attempt to get long resulted in a loss when the August-April-May 6:3:2 cattle crush spread collapsed to a new contract low and even traded below the 2011/2012 double bottom lows on the weekly nearest-futures chart. This double bottom was an all-time low for the front month cattle crush spread, by the way. Long-term, this spread cannot stay inverted as it would mean that the live cattle are trading below the cost of production. Only the US government can get away with operating in the red year after year!
Once the August-April-May 6:3:2 cattle crush spread gets back above ‘even money’ we will be watching for setups to add to the long position.