Long the Mar. 2015 Feeder Spread. 4-2-8 Sell the inputs buy the finished Short 4 Mar. '15 Feeders FCH15 @ 217.275 Short 2 May '15 Corn CK15 @ 359.50 Long 8 Aug. '15 Live Cattle @ 147.800 @ current prices GFM @ $0.77 per cwt. or $9.46 per head Target exit with GFM @ $3.50 + per cwt. or $40.00 per head
Thanks for the post I like this kind of spread. Its makes sense that the spread cant be too low because farmers can stop buying live cattle if they dont make money with it. I ll backtest it wednesday.
There must be something wrong with the typical ratios we use( 1-1-2, 5-4-10...). They all show negative feeding margin while it is supposed to be a profitable period for feedlot operators... IMO 1 corn contract is not really representative of the input costs...
Yes the 4-3-8 and 5-4-10 ratios have been generally accepted. Past posts of mine have used these ratios. However I fallow the Cattle Finishing business very close. I have data going back to 1975 and have compiled data from USDA placement and slaughter reports. I also continue to do personal research by visiting numerous feedlots and cattle auctions each year. In the 1950s the Feed Conversion Ratio (FCR) was 10:1 through extensive dietary research, genetics via selective breeding, and other factors, the FCR is today pegged @ 6:1 The U.S. Department of Agriculture, National Agriculture Statistic Service provides monthly feedlot placement reports with breakdowns for < 600 lbs., 600-699 lbs., 700-799 lbs. > 800 lbs., based on these reports the average placement weight is 708 lbs. Reports for Federally Inspected Beef Slaughter Live weight show an average of 1235 lbs. . Therefore the average of 750 lbs. feeder input vs. 1250 lbs. Live output with a 500 lbs. weight gain is still used. 1 Feeder Cattle contract = 50,000 lbs. or ~ 66 head. ( 50,000 / 750 ) 1 Live Cattle contract = 40,000 lbs. or ~ 32 head. ( 40,000 / 1250 ) x 2 = ~ 64 head. For our analysis of each ratio, we'll round it to 65 head per spread and take the number of head X the 500 lbs. to calculate total Pen Weight Gain (PWG). Example: 2 Live = 65 hd. X 500 lbs = 32,500 PWG. The 4-2-8 ratio = ~ 260 head x 500 lbs. = 130,000 lbs PWG 70% of 130,000 lbs. = 91,000 lbs. x FCR @ 6 = 546,000 lbs. of Corn / 56 lbs. per bu. = 9,750 bu. 75% of 130,000 lbs. = 97,500 lbs. x FCR @ 6 = 585,000 lbs. of Corn / 56 lbs. per bu. = 10,446 bu. So based on research IMO the ratios of 4-2-8 or 5-3-10 more accurately reflect and mimic the cattle finishing business of today. It should also be stated that provided the GFM increases as anticipated the 4-3-8 should also perform well. Since it was my intent to follow-up on this strategy It will be no trouble to include a comparison with other ratios. Should be interesting. I well post the details for the other ratios with the same prices shortly
Thanks a lot for the work. It makes more sense now. Did you choose march because it is the most negative margin next year?
Based on the prices stated in post # 1 we have the following. Ratio 1-1-2 @ current prices GFM @ ($10.47) per cwt. or ($128.81) per head Ratio 3-2-6 @ current prices GFM @ ($2.98) per cwt. or ($36.63) per head Ratio 4-2-8 @ current prices GFM @ $0.77 per cwt. or $9.46 per head Ratio 4-3-8 @ current prices GFM @ ($4.85) per cwt. or ($59.67) per head Ratio 5-3-10 @ current prices GFM @ ($1.48) per cwt. or ($18.19) per head Ratio 5-4-10 @ current prices GFM @ ($5.97) per cwt. or ($73.50) per head
Not really, been wanting to go long the GFM for some time now. March looked good, didn't want too short a fuse and going out further had less chart history.
Thanks stoic for all you knowledge. I am not expert but I also feel that the corn cash basis can also be a factor in the strange GFM. Farmers also use DDG & soymeal which is not the same as corn.
Basic Cattle Feed Rations utilized by feedlot include: No. 2 Corn, Ear Corn, Corn Silage, Alfalfa, and protein supplements. On my last trip out, in July & August this year, was the first time feedlot operators mentioned Distillers Grains with all reporting positive results.