Cattle Basis Not Following The Rules

“Cash is cash and futures is futures” was one of the trading truisms of one old-time lumber trader, and the axiom appears to be alive and well in the current cattle markets as well.

The late Tom Martin had many trading rules, most of which were meant to curb his enthusiasm about trading and to keep him out of trouble.  This one was to remind him that futures and cash markets can and do trade on their own, sometimes with only a nodding regard to each other.

A look at the difference between weekly Kansas cash fed steer prices and the nearest futures contract, or the basis, shows a divergence from a 2009-2013 average that at times is very large.  The normal basis cannot be relied upon to give traders a good idea of where the futures market is projecting cash to be in any given week since the relationship of cash to futures appears to be out of synch.

Last week, the basis was a minus $4.34 per cwt, meaning average cash prices were $4.34 below the corresponding futures price.  If the five-year average is any guide, the basis should have been a minus $0.51.

The standard deviation for the average basis last week was $2.00, meaning last week’s basis was more than $2.00 per cwt below the range of where prices should have been based on historical basis averages.  And the cash and futures markets need to converge by Dec. 31, the last trading day of the Dec futures contract.

 

IT GETS WORSE

 

But that’s not the worst case.  A quick glance at a table of basis levels for this year shows that for the week ended Oct. 3, the basis between the cash market and Dec futures contract was a minus $12.58 per cwt, $10.24 below the $2.34 average and well beyond the $1.46 standard deviation.

It can be argued that an increasing percentage of cash cattle sales now were hedged against the Feb contract and not the Dec and that any basis comparisons should at least include the Feb contract.  OK.  Fair enough.

The basis last week for fed steers in Kansas was a minus $6.46 per cwt from the Feb contract, $4.05 below the 2009-2013 average of a minus $2.41 and even well outside the range of the standard deviation of $2.17.

 

TIMEING CORRESPONDS WITH INCREASED VOLATILITY

 

The timeframe of the wide basis divergences roughly corresponds to increased volatility in the futures market.  Investors are struggling with consumers who aren’t following the rules in a market bedeviled by abundant supplies of beef, pork and chicken and adequate inventories of turkey.

And whenever gasoline prices have declined over the past decade, consumers often responded by buying more and better quality beef.  Analysts say they have this time as well, but that the effect is muted by competition from other meats and by imported beef.  The result has been lackluster fall beef markets that haven’t lived up to expectations based on previous years’ experience – but they could.

Traders have been tossed about by the vagaries of the market, leaving the basis to flounder.

 

 

CASH FED CATTLE MARKETS TRADE EARLY

 

Cash fed cattle markets Tuesday traded in Iowa at $121 per cwt on a live basis and $195 dressed.  On the surface, this looks like the bulk of the cash cattle this week will be lower, but market sources say the cattle were small heifers with muddy hides.

Last week, trading was light at $124 to mostly $127 per cwt live and at $195 dressed.  Both were about steady with the previous week.

Wholesale beef prices Tuesday were lower after being mixed at midday.  The USDA choice cutout was $203.81 per cwt, up $1.84 on the day, and the select cutout was $192.69, off $2.17.  The choice/select spread widened to $11.12 from $10.79 on Monday, and there were 78 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Monday was $174.05 per cwt, up $0.25.  This compares with the Jan settlement Tuesday of $164.40, up $1.65.