The Live Cattle spread strategy is designed to take advantage of a
repetitive set of seasonal circumstances affecting the relative
prices of live cattle futures for delivery in June and October of the
same year.  The pattern usually begins in late January or early
February when the prices of the normally more expensive June contract
and the less expensive October contract begin to converge.  By late
February or early March, seasonal factors normally come into play and
the spread between the two begins to widen.
 
There are two main reasons for the June/October seasonal pattern:
the rate of cattle slaughter and the quality of the cattle themselves.
Fewer cattle come to market in the spring months which means that
prices will have to rise by June to offset reduced supply.  Because
the slaughter rate will pick up by October, October prices will not
be affected and may even be pushed down.  Why the seasonality of the
slaughter?  Normal calving time for cows is in the spring.  The second
reason, quality, is due to the fact that spring cattle are likely to
be corn-fed because corn from the previous fall harvest is still
plentiful and cheap.  By early fall, cattle coming to market are
likely to be grass-fed because grain is likely to be in short supply
and pastures are lush.  Because grass-fed beef is considered to be
lower quality, prices are lower.
 
Because cattle are a nonstorable commodity, this spread has a higher
degree of risk that other agricultural spreads such as the grains
and the soy complex.  Between 1969 and 1990, this trade had three
losing years and one breakeven year.  Notwithstanding this record,
one should do back testing on 6 or 7 years worth of data to quantify
the fundamental relationship.
 
Sources:
 
Winning in the Futures Market, A Money-Making Guide to Trading and
Speculating. by George Angell, Probus, 1990.
 
The Commodity Futures Game. Who Wins? Who Loses? Why? by Richard J.
Tewles, Charles A. Harlow, Herbert L. Stone.  McGraw-Hill, 1977.
 
The SuperInvestor Files. Hume Publication, 1989.
 
A Complete Guide to the Futures Markets.  Fundamental Analysis,
Technical Analysis, Trading, Spreads, & Options. by Jack D. Schwager.
John Wiley & Sons, 1984.
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