Cattle market : Futures arb

Discussion in 'Commodity Futures' started by Midas, Mar 17, 2009.

  1. Midas


    Does anyone here buy physical cattle in local (relatively ineffecient) livestock markets and short live cattle futures when contango or arbitrage opportunities exist?
  2. Not that simple dude. The contract calls for 40,000 pounds which is a little less than 40 fat cattle. Needless to say you must ship these cattle from the auction, have sufficient area to keep the cattle, feed the cattle, etc.

    Now if you were talking arbing the pit vs screen all day now that would be a venture that would be quite profitable. However drawbacks there include having a merc membership, knowing someone in the pit, etc.
  3. Try it with the egg contract.
    Go buy a truckload of hens, clean out the garage, start to arb the cash market
  4. Midas


  5. There are a lot of arb opportunites in cash:cash cattle. It's a little harder imo to do futures:cash arb. Land, experience, and capital are prerequisites. There is a decent amount involved. I have an uncle who does cash cattle arb and makes a wonderful living at it.
  6. Midas


    What cash market does he bid in, is it a local market? How does cash:cash arb become more cumbersome? It still requires land, experience, capital, etc.

    Thanks for your input
  7. arb is MUCH easier in feeder cattle rather than live cattle. Selling fats is a much more difficult ballgame...for starters, you are NOT going to find 1200 lb cattle for sale at a salebarn, you would have to bid for them out of the feelot, which is what the packers do, so unless you buy feeders and put them on feed and try to "outguess" the deferred board, you are swimming up the wrong creek. Also, too many variables in feeding cattle (ADG, avg conversion, weather, health, access to more than one packer etc) to make simple "arb" possible.

    Feeder cattle, however, are another story. Since the index is cash settled, it makes it even easier, imo. The only caveat to doing this is knowing regional basis that feeders sell for (prem or disc.), and also you need a "head" for knowing cattle. For instance, just because you think a calf is selling "cheap" doesn't mean he his...unless you have been around cattle before, and know what cattle will "improve", and which type are overvalued (seen in a LOT in black hided calves), then I would stay away. Before doing this, know the difference between #1, #1 1/2, #2's etc, also know your area....where I live we have some of the highest values for feeder cattle in the country, because most of the nations feedlots are within 150 here arb opportunities are a harder than they would be in other areas..because everyone and their dog is looking at these cattle.

    One last piece of advice...if you do think you can "arb" live cattle...for the love of all things good out least know what the hell the difference is between selling on the grid and selling live, and know your cattle, and feed them in an area that will best suite the way you plan to sell them (grid vs live). Hint: Texas yards sell mostly "live", KS/NB/Midwest all sell mostly on the grid. There are reasons for this, get to know them.

    Also, if you can pick "undervalued" cattle out of the south, an arb opportunity DOES exist in taking normally priced "live" cattle and weighing them up on the grid, but you had better know your shit, or you'll lose your ass mucho pronto!
  8. Midas


  9. Midas,

    not trying to be rude, just being honest, but you won't learn how to "trade" physical cattle from any book or seminar. You just have to be around cattle for a while, and get to "know" them. Then, you have to "earn your seat" in the salebarn...some of those 60y/o cattle jockeys in there are a helluva lot smarter than you'd think, and I'd put a few of them up against the boys in Chicago anyday.

    Having said that, in addition to trading I do put stocker cattle out each year, and occasionally feed some too. Free advice: now is NOT the time to be feeding cattle. These yards are just now starting to see ration costs come down, as they've just now fed up most of their $6-7 corn, and are getting into some of their cheaper stuff. The "roll" however, from feeder to fat is still WAY too high to make even this cheaper corn work (take front month feeder, subtract LC contract from 4 months out to get the "roll").

    Also, I've bought some cattle from Florida before, from down in the Kesemmee (sp?) area. Florida cattle are fairly consistent as far as type goes, in my opinion, so it would be an easy market to learn. Watch the Superior Sale over the satellite sometime, lots of Florida cattle on there. Superior cattle usually go for a lot higher than you'd buy them for at the local barn, but it will give you an idea of how cattle are being priced from different regions, and across different types. Florida calves, for instance, will NOT bring what a calf out of KS or TX will bring, for 2 reasons: distance to feedyards / packers, and quality.

    Finally...maybe rather than looking at physical cattle arb, have you looked at just trading the "cattle crush" spread?? If not, here's a breakdown:

    Buy: 2 Feeder Cattle
    Buy: 1 Corn (pref. 2 months deferred from the FC month)
    SELL: 4 Live Cattle (4-5 months deferred from the FC month to simulate 120-150 avg. days on feed).

    Most popular "crushes" to trade are "based" around spring Feeder contracts, or around Oct Feeder contracts.

    you can chart this spread on many commercial charting applications....but get the pit data, screen is a little thin on the feeders.
  10. When you say "FC Month" do you mean the month that the futures contract is due to finish?

    Also, I've been looking for not-so-traded spreads out there in the AG world, any other spread tips?

    #10     Mar 19, 2009