![]() The cattle crush spread tracks the key points in the cattle finishing process. Never again reaching their March or early April lows Despite the bearish situation cattle contracts rose steadily through April into May. At the same time feedlots who would be struggling to sell off their finished cattle would in turn slow down purchases of feeder calves so GF prices would also decline (Martinez et al., 2020 ). LE contracts are made up of cattle ready to be slaughtered and slaughter rates were declining during April so in turn LE futures prices should have been falling as there would be no market the ready to be slaughtered cattle (Martinez et al., 2020 ). This rise goes against the theory that plant shutdowns had large effects on the cattle crush spread. Shown in figures 4 through 6, cattle futures rose through the rest of the spring even with the occurrence of more packing plant shutdowns. We examine the relationship of four cattle crush spreads that were trading at the time of the crisis and the June E-Mini S&P futures contract.įigure 6: Corn Contracts, January to June ![]() To this end we test for cointegration, a concept defining equilibrium between two or more price series. Our research tests whether the cattle crush spread became correlated with broader equity markets during the COVID-19 stock market crash in March 2020. However, as seen in figure 3 many of the initial drops in the cattle crush spreads came in mid-March, coincident with declines in the S&P 500. Weekly cattle slaughter numbers reached a yearly low during the first week of May (Martinez et al., 2020). The earliest plant shutdowns occurred at the end of March and continued through April (Reuters, 2020). The decline seen in cattle markets was popularly attributed to the shutdown of beef packing plants due to Covid outbreaks among their workers. The cattle crush spread is a hedging tool composed of futures contracts for live cattle (LE), feeder cattle (GF) and corn (CZ) that measures the profitability of finishing beef calves. ![]() Similar drops were seen in agriculture futures exemplified by figure 3, showing the movements in the cattle crush spread. Figure 2 shows the June contract for the E-Mini S&P 500 futures contract, which experienced dramatic falls throughout much of March. Faced with unprecedented uncertainty due to the COVID-19 pandemic, markets responded with sell offs across all asset classes, regardless of their susceptibility to the virus. This appeared to be true in March of 2020. Essentially, unrelated assets may be traded as a group due to fears of the unknown. The market adage “all correlations go to one in a crisis” refers to uniform financial market declines during times of extreme volatility.
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