However, we know that cattle prices are certainly paying attention to the corn market and that any continued corn price weakness can help to provide support for feeder cattle prices. While feeder prices have been on a nice uptrend over the past month, it can’t be simply attributed to lower corn prices alone. It is impossible to disentangle the relative impacts of factors affecting real-time price changes. So a decline from $4.00/bushel corn to $3.60/bushel would suggest a feeder price increase from $150/cwt to $152.70/cwt. To put their findings into a current context, what might a ten percent decline in corn prices imply for feeder cattle prices? It would suggest a 1.8 percent increase in feeder cattle prices. Further, they found that feeder prices have become more responsive to corn prices since 2008. Using monthly data, they found that a one percent increase in corn price reduces feeder cattle prices by about 0.18 percent. feeder cattle) can increase without increasing the total cost to produce a fed animal.Ī 2017 study by Tonsor and Mollohan at Kansas State University (available here) highlights this relationship and estimates the impact that a change in corn price has on feeder cattle prices. cost of gain) declines, the price of the other input (i.e. The inverse relationship exists because corn (feed) and feeder cattle are the two major inputs into the production of fed cattle. In the wholesale beef market, the USDA priced choice cuts of beef at 281.02 per cwt, down 2.33 from Friday, while select cuts rose 1.50 to 273.94 per cwt. April feeder cattle finished down 0.025 cent at 194.625 cents per pound. Higher implied volatility of lower delta puts directly impacts the risk-reward profile of a Put Vertical strategy. CME April live cattle settled 0.300 cent lower at 162.025 cents per pound. This relationship assumes that all other factors that affect price remain constant such as other feeding costs and live cattle price. Live Cattle, Feeder Cattle, and Lean Hogs have all experienced a historically larger put skew leading to low delta (1-20) puts exhibiting a higher implied volatility compared to equal distant calls or at-the-money options. In other words, as the price of corn decreases, the price of feeder cattle increases. Just 18 trading days later, it closed Monday at a contract low of $3.77.Ĭorn price is assumed to have an inverse relationship with feeder cattle prices. The December 2018 corn futures contract price hit $4.26 on May 23rd – its highest level since July 2017. Both nearby and new crop corn futures prices have tumbled by over 40 cents or approximately ten percent. Corn prices have been on a sharp downtrend since late May due primarily to a combination of trade uncertainty and a strong start to the growing season.
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