Wide Cattle Basis Shows Lack Of Investor Confidence

The weekly Kansas fed cattle basis is extremely wide, with cash over the Jun futures contract last week by $19.81 per cwt, compared with a 2012-2016 average of $7.33 and a standard deviation of $1.66, USDA and CME Group pricing data showed.

The basis is the difference between cash and the stated futures delivery month expressed in terms of cash minus futures.  The current situation means cash prices are being led lower by the futures market and investors’ collective distrust of cash pricing going forward.

However, just because the basis is extremely wide does not mean the markets have to oblige.  To avoid extensive deliveries, cash and the expiring futures delivery month have tended to converge before the delivery month ends, but other months can maintain a wide basis.

The Livestock Marketing Information Center calculates the weekly basis level for Kansas market, using them as a proxy for the whole fed cattle market.

In the latest week, the basis is wide by a positive $12.48, or 170.3%, when compared with the five-year average.




But the basis was wide by a very positive margin last year, too, for another two weeks.  The 2017 week last week was wide by $16.56, with this week last year wide by $12.19, and the basis two weeks out wide by $10.98.  By comparison, the 2012-2016 average basis for these three weeks was $7.33, $7.43 and $7.33, respectively.

But then the basis closed.  The very next week, the basis was $7.92, compared with the 2016-1016 average of $6.02.  The basis remained positive until the last week the Jun contract was traded when it went negative by $1.26 versus a five-year average of $0.11.  And it never went wider than $4.60.




The continued wide positive basis says futures traders see less reason to think current cash prices will hold as the weeks progress.  USDA Cattle on Feed data show that placements into feedlots were above year-earlier numbers through the fall and winter, and many believe these cattle are about ready for slaughter.

In fact, last week’s cash market might suggest these cattle either have begun to be offered to feedlots or about to be offered.  Feedlots were not able to maintain the prices of two weeks ago, even though packers are thought to be making significant profits on each head slaughtered and processed, a situation that incentivizes them to kill aggressively.

If more cattle are about to pressure cash cattle prices, the basis should narrow accordingly a market analyst said.

What’s more, cash cattle prices could be hit with a double whammy if export orders are declining.  A decline in demand just as more fed cattle come to market could erase the current wide basis quickly.

Feedlot showlists this week were about steady overall with declines reported in Nebraska and gains elsewhere.




No cattle sold Wednesday on the Livestock Exchange Video Auction, compared with sales the previous week at $122.40 per cwt.

Cash trading last week was at mostly $122, up to $123, per cwt on a live basis, down $2 to mostly $4 from the previous week.  Dressed-basis trades were reported at $193.50 per cwt, down $1.50.

The USDA choice cutout Monday was up $1.15 per cwt at $232.12, while select was up $0.43 at $209.12.  The choice/select spread widened to $23.00 from $22.28 with 85 loads of fabricated product sold into the spot market.

The CME Feeder Cattle index for the seven days ended Friday, was $136.12 per cwt, down $1.09.  This compares with Monday’s May close of $135.40, down $3.02.