Technical University Munich Commodities as an Asset Class - risklab

2.1 The different Commodity Types
feedlot, the cattle are fed a special food mix including grain, e.g. corn or wheat, a
protein, e.g. soybeans, and roughage to encourage rapid weight gain. The animal is
considered ”finished” when it reaches full weight typically 1200 pounds. Then it is
sold for slaughter to a meat packing plant. 34
Because feeder cattle is a downstream product of live cattle it is traded at a premium
and price movements between the two commodities are highly correlated with
a significant correlation coefficient of 0.53. 35 Figure 2.13 shows live cattle statistics
including prices, inventory, production and consumption.
Figure 2.13: Cattle Price, Stock of Inventory, Production and Consumption
The huge price increase in 2002 was caused by a decreasing inventory of 30 million
heads worldwide from 2002 to 2003 caused by high feeding costs. But, the total
number of calves (and their age) is not enough to describe supply: the prices of
feed, i.e. of corn, wheat and soybeans, make a big difference since animals are fed
longer if corn is cheap. This pattern can be seen in Figure 2.14 what shows the price
development of feeder cattle and corn.
Unfortunately, over the long run significant anti - correlation could not be proofed.But
analyzing weekly futures data during the period of 1994 and 2006 a significant negative
correlation of -0.15 could be found.
34 See [The CRB Commodity Yearbook 2005].
35 For the analyzes of this section we took monthly cash data since 1970 of the
[The CRB Commodity Yearbook 2005] completed with Bloomberg data for 2005 and 2006.
We used monthly log returns as of Definition C.2. For the mathematical definition of Pearson
correlation and the related statistical test see Section 5.1.2.
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