The basis for fed steers in western Kansas is much wider than the 2010-2014 average, but a wider basis has been a trend the last few years and may continue.
The basis, or the difference between cash and futures prices, last week was $9.17, $4.13, or 81.9%, above the five-year average of $5.04, according to calculations by the Denver-based Livestock Marketing Information Center.
For this week, the five-year average basis is $3.71, yet with the cash market trading at $132 per cwt on Wednesday and the Jun futures contract settling at $123.12, the basis already is shaping up to be $8.88.
THE TREND WIDENS
But there appears to be a trend toward wider basis levels at this time of year. Last week’s basis of $9.17, for instance, was well above the 2010-2014 average, but was only $0.32, or 3.62%, above the $8.85 basis in the same week a year earlier.
And the basis for that week in preceding years gets progressively larger going back to 2011 with the exception of 2013 when the basis narrowed.
This week’s basis also has been widening in previous years. Last year, it was $8.99, only $0.11 away from this week’s preliminary estimate of $8.88, and it has widened in each succeeding year since 2011 when it was $1.49.
The five-year average basis for this week and last will widen when the charts are recalculated, but the new five-year average likely will remain behind the trend.
REASON FOR CAUTION
However, as cash markets continue to climb above the corresponding futures delivery month, there is reason for caution. Some have tied the gains in beef and cattle prices to gains in the economy as represented by the stock market.
A graph of the Dow Jones E-mini Globex futures price from TradingCharts.com gives some idea of what analysts are talking about and why some are sounding an alarm about the future of this futures market. It shows progressively higher prices from the 2008 recession bottom to the peak in early 2015.
Since then, the stock market has shown trepidation about moving higher, indicating a softening in the economy at the manufacturing and service levels.
If the stock market goes south, consumers may cut back, and the first place to cut is always the grocery budget. It is the budget with the most discretionary spending, allowing consumers to choose less-expensive cuts or even to substitute for other meats.
If that happens, beef and cattle prices will suffer. The problem for producers is that a growing number of consumers are finding out the difference between choice, select and non-graded beef. They are finding that you get what you pay for in terms of eating enjoyment. So just how much they might cut back is anyone’s guess.
CASH CATTLE MARKET STEADY TO $2 LOWER
Cash cattle markets Wednesday were steady to $2 per cwt lower at $132 on a live basis in Texas and Kansas. Other areas did not trade as feedlots were asking $136 to $137 live. In dressed markets, bids were posted at $205 to $206 against asking prices of $215.
Cash markets last week were $5 to $6 per cwt higher at $132 to $134 live. Dressed-basis prices were up $7 to $9 at around $207.
The USDA’s choice cutout Wednesday was sharply higher at $227.767 per cwt, up $2.43, while select was up $0.60 at $212.20. The choice/select spread widened to $15.56 from $13.73 with 65 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Tuesday was $148.45 per cwt, up $0.08. This compares with the May settlement Wednesday of $149.50, down $0.02.