Drought, Beef Prices & Calendar Spreads

Not to take anything away from the ongoing drought, but this seems a natural calendar spread trade on cattle/beef prices. Sadly, however, the COW ETN is illiquid and has mammoth bid/ask spreads.

“One of the biggest impacts of the drought is going to be the shrinking of the cattle herd in the United States,” said Bruce A. Babcock, an agricultural economist at Iowa State University in Ames. And that will have a paradoxical but profound impact on the price of a steak.

Ranchers whose grass was killed by drought cannot afford to sustain cattle with hay or other feed, which is also climbing in price. Their response will most likely be to send animals to slaughter early. That glut of beef would lower prices temporarily.

But America’s cattle supply will ultimately be lower at a time when the global supply is already low, potentially resulting in much higher prices in the future.

via Drought Spreads Its Pain Across 14 States – NYTimes.com.