The average October basis for fed cattle may be even weaker than last year after futures prices jumped higher on Friday and appear to be holding relatively flat through Tuesday.
Basis is calculated by subtracting the futures delivery month price from the cash price. The average live cattle futures price in July, for instance, was $107.13 per cwt, and the average fed cattle cash price in Kansas in July was $112.11, leaving a Kansas basis of $4.98. The basis can go negative when cash prices dip below futures prices.
In the short term, a cash price that is below the futures price generates less selling interest from cattle feeders than one that is above because it costs hedgers to buy back their hedges once the cattle are sold. A bid above the nearby futures price is likely to bring more selling interest since feeders can cover their short futures position at a lower cost than the cash price.
Often, a cash price that is more than $2 per cwt below the futures price, or a minus $2 basis, is the cutoff point for many as a delivery month (like Oct) draws near since it costs about that much to deliver them against a futures contract.
A few cattle were said to have traded this week already at $111.50 per cwt, up $0.50 from the bulk of last week’s activity. Futures prices Tuesday morning were running about $113.12 per cwt, a negative basis of $1.62.
“We’ve enjoyed a positive basis for so long that people are reluctant to accept a negative basis,” a feedlot manager said.
BASIS TENDS TO WEAKEN INTO OCTOBER
August 2018 data is not complete in the USDA system, but in 2017, the average Kansas basis for August was a positive $2.01, according to USDA’s Agricultural Marketing Service data that was compiled by the Livestock Marketing Information Center. The 2013-2017 average for August is a positive $1.41.
The five-year average Kansas monthly basis for September is a positive $0.55, but for October it drops to a minus $0.67. The average monthly basis struggles back above even again in November with a positive $0.03, but by December it has come back to a positive $0.53.
During the 2013-2017 period, the lowest September basis for Kansas was a minus $2.18 in 2013, according to AMS data. The next lowest was a minus $0.83 last year. The highest was a positive $4.34 in 2014.
And the weakest five-year-average October basis for Kansas was a minus $2.27 in 2014, followed by a minus $1.45 in 2013. The next weakest October was in 2015 when it was a minus $1.25. Last year, it was a minus $0.07, but in 2016 it was a positive $1.66.
The next Cattle on Feed report may have a lot to say about the 2018 October basis.
CATTLE, BEEF RECAP
No fed cattle sold last Wednesday on the Livestock Exchange Video Auction, compared with 280 that traded three weeks previous at $109.50 per cwt.
Very limited cash trading was reported this week at $111.50 per cwt on a live basis, up $0.50 from the bulk of last week’s action. Dressed trade was reported at $170 to $174, down $3 to $4 from the bulk of last week’s trade.
Light cash cattle trading was reported in Nebraska early last week at a steady $107 per cwt on a live basis and $170 dressed. Friday, cattle traded at $111 per cwt live, up $3 to $4, and $172 to mostly $175 dressed, up $4 to $7.
The USDA choice cutout Tuesday was down $0.75 per cwt at $205.29, while select was off $1.91 at $195.47. The choice/select spread widened to $9.82 from $8.66 with 144 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Monday, was $153.62 per cwt, up $0.24. This compares with Tuesday’s Sep settlement of $155.82, down $1.50.