Cash cattle prices in the Plains have fallen in each of the last four weeks, and it’s easy to see why when the basis with the Jun futures delivery month is considered.
Using the average basis, or the difference between cash prices and futures prices, from Kansas as a proxy for the whole market, one can see that it is better for hedged cattle feeders to accept lower cash prices for their slaughter-ready cattle and then cover, or buy back, their short hedge in the futures market than to try and hold out for an extra dollar in the cash market.
For instance, the Jun live cattle futures contract Friday settled at $112.45 per cwt, which was up from Thursday’s $111.95. However, this was well below the $120 to $121 cash price that cattle feeders received for fed steers in the Plains last week.
Hedged feeders could sell their slaughter-ready cattle and then rebuy their futures hedge at a lower price and pocket the difference. This works when futures traders are more pessimistic or stuck in a losing long position that they need to get out of and futures prices drop below the cash market.
It’s called a “positive basis” because by subtracting the futures price from the cash price, the difference is a positive number. Said differently, it’s better for cattle feeders to sell their fed cattle to a packer when futures prices are significantly below the cash price, even though the cash price may be lower than the previous week’s market.
FUNDS LIQUIDATING LONG POSITIONS
And live cattle futures could continue to struggle for a bit, an analyst said. They could even sink some more, with no real good reason.
Three weeks ago, large commodity investment funds, or “managed money,” held a record high collective net long live cattle futures position, which they have been cutting down the last two weeks. These traders are investors only and know little to nothing about raising cattle. Many have algorithms that rely on price trends more than any other factor.
As such, they were happy to continue buying live cattle futures prices as long as cash and futures prices continued to march higher. These investors would even put up with a few hiccups along the way and continue expanding their net long position.
However, once USDA data showed that cash prices likely had peaked for the year, the Jun futures contract lost much of its buying interest, and chart indicators turned bearish. At that point, managed money decided that its record-large long live cattle futures position was untenable and began to sell.
The sharp selloff took the Jun contract down faster than the cash market, resulting in the current positive basis.
Going forward, many traders believe US feed yards hold many cattle that were damaged by winter’s harsh weather and are pressuring futures markets. They reason that these cattle will need to come to market soon.
We’ll see.
CATTLE, BEEF RECAP
Cash cattle trading was reported last week at $120 to $121 per cwt on a live basis, down $3 from the previous week. Dressed-basis trading was reported at $193 to $195 per cwt, down $5 to $7.
The USDA choice cutout Tuesday was down $1.46 per cwt at $220.12, while select was up $0.08 at $208.97. The choice/select spread narrowed to $11.15 from $12.69 with 102 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Monday, was $135.07 per cwt, down $0.32. This compares with Tuesday’s May contract settlement of $136.00, up $0.95Ca.