3.4.2.2. Cattle Feeding Spread
The cattle feeding spread, sometimes called a “cattle crush,” is an example of a futures spread that has multiple inputs and a single output. The difference between the value of the purchased inputs and the value of the live cattle sold is called the gross feeding margin.
While a 10:11:9 soybean crush can be bought and sold directly on the exchange, a cattle crush is not offered on the exchange and must be pieced together by the investor. This is because cattle are live animals that differ in weight and rate of growth from one feedlot to another. Each feedlot operation has a unique set of costs.
The components of a cattle feeding spread are feeder cattle, corn, and live cattle. Feeder cattle are calves (from 600 to 800 pounds) that are ready to be shipped to feedlots for fattening. For the next six months or so, they are fattened principally on corn until they reach a marketable weight of 1,250 pounds. Cattle that are ready for slaughter are known as live cattle.
The components of a cattle feeding spread might be calculated as follows. One futures contract for live cattle has a contract size of 40,000 pounds. At 1,250 pounds per steer, that contract will support 32 live cattle. At 750 pounds per calf, a 50,000-pound feeder cattle contract will cover roughly 66 feeder cattle. Where 50 bushels of corn will fatten one feeder over a production cycle, a 5,000-bushel corn contract may feed 100 cattle. Under these assumptions, a 2:3:6 spread (2 corn contracts, 3 feeder cattle contracts, 6 live cattle contract) will constitute a nearly perfect hedge. Each leg of the contract is sufficient to bring about 200 cattle to market.
|
Futures Contract |
Contract Size |
Unit Size |
Cattle/Contract |
Contracts |
Cattle to Market |
|
C |