Live cattle cash price vs futures contract prices

Discussion in 'Commodity Futures' started by GI JOE, Feb 18, 2018.

  1. GI JOE

    GI JOE

    Hi everybody, I have a doubt on the price cash vs price future June 2018 on the Live Cattle (LE). the cash price and the nearest futures prices are the followings:
    Cash price: 126,160; feb. future: 130,100; Apr future:127,65; june future:118,675.

    As you can see there is a notable difference in price between the cash and June future (but also compared to the April future). I have sold call options at 128 and 130 strike on June contract and I am wondering if the future price (june) could extend and fill that gap price to align to the cash price or at least get very close. It is not clear to me the dinamic of such a situation when further in time futures contratcs are pricing lower than the cash price and the closer futures.

    Besides, the seasonality looks to be bullish starting from April. I am trying to figure out a possible price scenario of June contract from now to the expiration in order to see if i need to adjust my call sold options.

    thanks for your help
  2. MattZ

    MattZ Sponsor

    A few years back the Cattle Association wrote an open letter to the CME about the price gaps that exist between the cash and the Cattle Futures fluctuation, especially the intraday fluctuations.

    This article explains some of these issues that were addressed:

    In my opinion, (for the sake of simplicity and risk management) just follow the Futures prices. They will have the direct impact on your options,
    GI JOE likes this.
  3. GI JOE

    GI JOE

    Thanks mattz. I am Also trying to give myself an explanation that could be supported by fundamentals reasons, but i can't find any. Looking at the recent Feeder cattle report the placements are much higher compered to the year before but Also the Consumer's confidence is improving.this should push higher the consume of meat. In addition to that we have a bullish seasonality in spring as the consume of meat is going to increase in Summer. After such analysis i got to the conclusion that summer cattle futures should price higher, closer to the feb.-apr Futures price and cash price. But this is not
  4. The article does not apply to this situation. You are not trading spot cash cattle you are trading a futures contract. Traders obviously feel like there will be more cattle ready for slaughter in June. If you disagree then you can take an opposing position. The discrepancy between cash and futures only must converge on last trading day. If you explore into cattle trading you will find producers and producer letters only complain when market goes down ( who would’ve thought right )

    Happy trading
    GI JOE likes this.
  5. Higher placements mean more live cattle
    GI JOE likes this.