Last week’s fed cattle basis is just wide enough in the right direction to expect a few deliveries on the February CME Group live cattle futures contract, a cattle feedlot manager said Monday.
Many things play into a decision to deliver or not to deliver, but the main consideration for many is the basis, or the difference between the cash price and the futures price. Delivery is supposed to be the final force that forces the cash and futures prices of a given delivery month to come together, or converge.
If futures prices remain far enough above the cash price to pay for going to the trouble to deliver on the very specific CME Group futures contract, cattle will be delivered against the futures contract. But this means buyers likely could get similar cattle at a cheaper price in the cash market, pressuring futures prices to come in line with the cash market. If not, the cash market may be too low, and cash prices will be pushed up to the proximity of the futures market.
First-notice day, the day when those who wish to deliver on a live cattle futures contract is listed as the first Monday of the contract month, so traders will begin to get a feel for the desire to deliver at that time.
WEEKLY BASIS POINTS TO DELIVERIES
In the current situation, the weekly average basis between the cash market and the Feb futures contract for the week ended Jan. 19 in Kansas was reported by the Livestock Marketing Information Center in Denver, Col., at a minus $2.82 per cwt. The basis is different for each feedlot, but a general rule-of-thumb is that delivering against a futures contract begins to become a viable option somewhere around a minus $1.50 per cwt.
However, the basis changes with each cash cattle trade or with each tick in futures prices, so the basis may even out and remove any inclination to deliver against the Feb futures contract. Or not.
As of the close of the futures market Monday, the basis between the bulk of last week’s cash trade at $123 per cwt on a live basis and the Feb futures close of $126.40 was a minus $3.40, meaning even more hedged cattle feeders could decide to deliver against the futures contract than a week and a half ago.
NEGATIVE BASIS UNCOMMON
Having a negative basis with the Feb futures contract as the delivery month draws near is unusual. LMIC calculations of USDA’s Agricultural Marketing Service cash price data and the futures contract show that the average basis for the third week of January is a positive $2.89 per cwt, precluding deliveries.
Further, the five-year-average basis usually turns positive around the first of the year and remains positive through the contract’s expiration at the end of February.
CATTLE, BEEF RECAP
Sixty-three head of fed cattle traded on the Fed Cattle Video Exchange Wednesday at $123 per cwt on a live basis.
Cash cattle traded last week at $122 to $123 per cwt on a live basis, down $2 from the previous week and at $197 on a dressed basis, steady to up $1.
The USDA choice cutout Monday was up $0.39 per cwt at $217.40, while select was down $0.42 at $211.61. The choice/select spread widened to $5.79 from $4.98 with 88 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Friday, was $143.49 per cwt, up $0.28. This compares with Monday’s Jan settlement of $143.47, up $0.10, and the Mar contract settlement of $144.35, up $0.73.