It looks like things will have to change before there can be significant numbers of live cattle deliveries this month.
A look at basis calculations from the Livestock Marketing Information Center in Denver shows that the basis, the result of cash markets minus the futures delivery month price, is too narrow to make delivering on a futures contract viable.
That could change if cash markets decline, the Feb delivery month futures price rises or a combination of the two.
BASIS TOO NARROW
To make delivering on a futures contract worthwhile, the expiring month’s futures price must be greater than the price a cattle feeder could get in the cash market. But that’s not all.
The delivery process is too complicated and fraught with risk to be attractive, a market analyst said. The only reason to deliver is to bring the futures and cash prices closer together or because the feeder needs to get rid of some cattle.
Increasingly, the fed cattle market is becoming a basis game, the analyst said. Corporate yards are 100% hedged all the time and constantly monitor the basis and their costs. It’s not like it used to be with a preponderance of small feedlots who weren’t hedged, allowing futures and cash to get out of alignment.
Delivering on a futures contract is not popular with today’s cattle feeders, but there are enough who will go to the trouble to keep futures and cash prices in close proximity by the end of the delivery month, which is the intent of the futures market.
DELIVERING ON A LIVE CATTLE CONTRACT
The CME Group lists the requirements for delivering on a live cattle futures contract covering three pages of single-spaced type covering all contingencies.
A clearing member with a short live cattle futures position in the delivery month must declare to the CME clearing house the intention to deliver 40,000 pounds of USA born and raised fed steers or heifers to a specific CME-approved delivery point.
All cattle must have an affidavit attesting that they haven’t been fed any animal proteins.
Usually, the clearing house will assign delivered cattle to the holder of the oldest long position in the delivery month, although there can be exceptions.
The delivering short must schedule the delivery with the receiving yard, bring more cattle than is required to fill the contract, at the deliverer’s expense and haul away any cattle that the USDA inspector deems not fitting the contract specifications.
It all seems to be too much, but the integrity of the futures contract is at stake.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $178.65 per cwt to $180.00, compared with last week’s range of $172.98 to $178.85 per cwt. FOB dressed steers, and heifers went for $275.65 per cwt to $280.36, compared with $272.94 to $280.41.
The USDA choice cutout Tuesday was up $0.59 per cwt at $294.07 while select was up $0.83 at $284.60. The choice/select spread narrowed to $9.47 from $9.71 with 85 loads of fabricated product and 22 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.35 to $1.45 a bushel over the Mar corn contract, which settled at $4.38 3/4 a bushel, down $0.04.
No delivery intentions were posted for the Feb live cattle contract.
The CME Feeder Cattle Index for the seven days ended Monday was $239.58 per cwt, up $0.10. This compares with Tuesday’s Mar contract settlement of $246.67, up $3.92.