The cattle crush strategy: trading opportunities for cattle producers

Nicolas Acevedo Velez

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This research shows that it is possible for cattle feeders to obtain additional profits if a consistent technical strategy for trading is applied to the cattle crush spread. However, when trading costs are introduced, the likelihood of obtaining profit from trading the crush reduces considerably. It also shows that the level of gains from the cattle crush is related to the month the cattle are marketed. When the crush is used as a hedging strategy it decreases the profit from the feeding operation and reduces the volatility of those returns, helping producers to transfer part of the price risk associated with their production. To provide evidence of these findings, this study utilizes daily prices for 1995 to 2006 of the futures contracts of corn, feeder and live cattle to construct the daily cattle crush spread for two different combination of futures contracts. These contract combinations suppose that cattle are fed in feedlots for 170 days before being marketed in April and in October. Two different scenarios are also evaluated using the cattle crush spread: one in which the crush is employed as a pre-placement hedging tool and another in which the crush is used as a post-placement hedging method.

Date: 2006-01-01
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