Feeder/Live Cattle Spread: Roll Out of the October Contracts

Rollover and Keep Riding the Bear Market

The blog entered a short position in the October feeder/live cattle spread at +$45,747.50 (premium feeders) on June 30th. October starts on Thursday so it’s time we roll this thing over.

Nov-Dec Feeder Cattle Live Cattle spread daily

Nov-Dec Feeder Cattle Live Cattle spread daily

The spread between November feeders and December live cattle is trading at a discount to the October spread. Nonetheless, the current level is still historically a good place to be short from. At a current price of approximately +$35k (premium feeders) we can expect another $10-15k of downside from here. Heck, anything above $15k used to be considered ‘pricey’ in the feeder/live cattle spread. Therefore, the ultimate destination of this spread could be significantly lower. Hopefully, we’ll see a few bounces of at $2-3K or more along the way. This could provide us with setups to add to the short position.

Ratio Confirmation

At today’s low of 1.65:1, the ratio between the value of one November feeder contract and one December live cattle contract is still at a level that has only been seen half a dozen times in the last half a century. This confirms that feeders are still historically overpriced in comparison to live cattle. The confirmation gives us a green light to maintain short positions and even add to them.

Nov-Dec Feeder Cattle Live Cattle ratio daily

Nov-Dec Feeder Cattle Live Cattle ratio daily

Based on the history of this ratio, it is not unreasonable to expect the ratio to return to 1.4:1 or lower. It has been two and a half years since the nearest-futures ratio has been this low. Previous monthly excursions above 1.4:1 were either side of two years in duration, so a return to 1.4:1 is overdue.

Feeder Cattle Live Cattle ratio monthly

Feeder Cattle Live Cattle ratio monthly

Furthermore, each time the ratio has reached 1.6:1 or higher it has always turned over and dropped back down to 1.3:1 or lower. It sort of acts like a pendulum where a run to one extreme end of the historic price range is often followed by a reversal that takes it back to the mean and beyond. This provides plenty of trading opportunities for the savvy spread trader.

Trade Strategy:

For tracking purposes, the blog will roll the October feeder/live cattle spread to the November feeder/December live cattle spread at the market-on-close on Tuesday, September 29th.

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