What do you guys think of the Hog to Cattle ratio? It seems to be at an all time high. I entered a small position today (short HE, Long LE). Wanted to know how/if more experienced commodities guys are trading this.
Some insight from our colleagues at Moore Research ( free trial if you have not had one here): Consider a relationship between cattle and hogs. Again, because feed is such a primary but variable cost of production, producers want to feed as many animals as possible when feed is most plentiful and thus usually least expensive. For US producers, that would be during and immediately after corn harvest in October/November. ,the Long December Cattle/Short December Hogs spread has closed more favorably toward cattle on about July 19 than on about May 22 for the last 13 years consecutively --- albeit not without several significant drawdowns. This spread bears watching, but traders will need to decide for themselves whether to be patient or to pursue it more aggressively. The seasonal pattern illustrates how it has tended to make its seasonal bottom any time between late April and mid June (when June Hogs expire). After declining this year from a high in January at 55.32 cents/pound, the spread declined in early May when it traded only 42.55. Seasonal tendencies are a composite of some of the more consistent commodities futures seasonals that have occurred over the past 15 years. There are usually underlying fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar period of the year. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account h as in the past or will in the future achieve profits utilizing these strategies. No representation is being made that that price patterns will recur in the future. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Results not adjusted for commission and slippage.
Total newb here - but if those are hog prices versus cattle prices, seems about a good a time to pull that off as ever.
Fading a random spread just because it looks stretched, without any knowledge regarding supply/demand expectations? Usually not a good idea.
Yes, your chart is pretty textbook, where supply has historically come in. Fibs support you position. I'm working through how corn fits into all of this, if at all. I'm of the position that corn's run is optimistically pausing.