The Kansas State University mid-month slaughter steer basis forecast for western Kansas predicts a widening basis into October from mid-month September to slightly more than $2 per cwt, followed by a decline into November to just above zero.
K-State agricultural economists graphed their latest predictions of western Kansas slaughter cattle basis through February of 2021 and published it on their Web site agmanager.info. The graph gives a three-year average basis forecast flanked by a most-negative of the last three years basis forecast and a most positive of the last three years basis forecast.
As is standard practice in the industry, the basis is calculated as the result of subtracting the futures price from the cash price.
At first glance, the graph shows a relatively close association between the most-positive and most-negative basis forecasts until March of next year. At that point, the basis forecast possibilities widen considerably, with the most positive forecast reaching a positive $18 per cwt and the most-negative forecast reaching about a negative $1 at the middle of April.
Up until the great divergence of KSU-forecasted mid-month basis levels, the expected basis holds in positive territory but close to even. Mid-January’s basis could bump up to rival the mid-October level, but it hardly seems noteworthy.
After the predicted basis range comes back together in May of next year at about $5.25 per cwt, it drops back down to about a positive $1 by June. From there, the only anomaly appears to be a predicted dip in September of 2020 to about a minus $1 followed by a jump in mid-October to a positive $2.
WHAT DOES IT MEAN?
The K-State economists offered no comments with their predictions, but a private market advisor said, the basis is market within a market that takes into account time, supply, location and logistics. It is affected by weather, demand, cattle flow and available feeder cattle supplies.
So, a cattle owner, or hedger, is a basis trader, the advisor said. A strong basis is great for the hedger, and a weak basis is bad for the hedger.
Conversely, a weak basis makes it harder for the packer to buy cattle from a feedlot, and a strong basis makes it easier for the packer to buy cattle, the advisor said.
With a weak basis, slaughter-ready cattle stack up in the feedlot, but with a strong basis, the incentive for the feedlot is to sell, sell, sell, so feedlot showlists, or the number of cattle feedlots show to packer buyers weekly, become very current with few, if any, over-finished cattle.
That means, a hedger putting some 600- to 699-pound calves on feed now with an April target date for slaughter may be able to take advantage of a wide, positive basis when they are sold to the packer for slaughter and processing, the advisor said.
CATTLE, BEEF RECAP
Cash cattle trade last week ranged mostly from $99 to $100 per cwt on a live basis with some at $101 late in Nebraska, down $1 to $2 from last week, and at $159 to $162 on a dressed basis, down $1 to $5.
The USDA choice cutout Monday was down $0.26 per cwt at $220.62, while select was down $2.03 at $196.57. The choice/select spread widened to $24.05 from $22.28 with 81 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Friday was $136.09 per cwt, unchanged from the previous day. This compares with Monday’s Sep contract settlement of $136.55, up $0.05.