Long Mar. '15 Feeder Spread 4-2-8

stoic

stoic

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
 

Attachments

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...:confused: IMO 1 corn contract is not really representative of the input costs...
 
Last edited:
TraDaToR said:
Interesting trade but why did you choose 4-2-8 and 5-3-10? Generally it is 4-3-8 and 5-4-10...
More...

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
 
Last edited:
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
 
TraDaToR said:
Thanks a lot for the work:). It makes more sense now.

Did you choose march because it is the most negative margin next year?
More...

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.
 
You must log in or register to reply here.
Back
Top