Feeder/Corn Spread: Roll To Aug and Sep Contracts

Near-Term Price “Cattle-yst” At Hand?!

The IMC blog has been holding a short position in the feeder/corn (x4) spread since September 6th.  Due to rollovers, the blog is currently short the April-May spread from the equivalent of -$9,912.50 (premium corn).

April-May Feeders Corn (x4) spread daily

April-May Feeders Corn (x4) spread daily

The spread is currently a stone’s throw from the contract high.  We’re hoping for a double top.  If it blasts thru to new contract highs, however, it would be prudent to take our lumps and get out.

Today we are going to roll out to the August-September spread.  Neither the April-May spread nor the Aug-Sep spread has ever closed with the value of the feeder contract at a premium over corn.  If that happens, it will be our signal to exit stage right.

Feeders Corn (x4) spread weekly

Feeders Corn (x4) spread weekly

A breakout above the even money level could allow this spread to race toward last summer’s high of +$10,087.50 (premium feeders).  If the run doesn’t stop there, who’s to say it can’t double the premium and reach +$20k?!

Also, the feeder/corn ratio is currently sitting just below 4:1.  A breakout above even money for the spread would mean that the feeder/corn ratio has exceeded 4:1.  If that occurs, the odds increase that the ratio will head for the next handle at 5:1.

Feeders Corn ratio weekly

Feeders Corn ratio weekly

Heck, it could even go higher than that.  If that happens, we will adjust the ratio of the spread to get closer to dollar neutral and look for a setup to get short on a reversal.  As you can see on the forty-year weekly chart, a ratio of 5:1 or higher does not come around very often.

Trade Strategy:

Buy back the short 50,000 lb. April feeder cattle contract and simultaneously sell short an August feeder cattle contract at the market-on-close on Tuesday, April 25th.  Also, sell the four 5,000 bushel May corn contracts and simultaneously buy four 5,000 bushel September corn contracts at the market-on-close on Tuesday, April 25th.  Risk the Aug-Sep feeder/corn (x4) spread to a two-day close above even money.


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