The difference between cash cattle markets and the nearby Aug futures contract is very wide, making convergence before the contract expires on Aug. 31 more difficult.
Something has to give. Either futures have to rise, or cash prices have to decline before expiration to get the two into close proximity by expiration.
The difference is called the basis and usually is figured against the nearest contract month. It is expressed as the cash price minus the futures price.
When cattle traded last week, the basis for fed steers in Kansas and the Aug futures was a positive $7.32, according to USDA’s National Agricultural Statistics Service data compiled by the Livestock Marketing Information Center.
That basis is $6.04, or 471.9%, above the 2010-2014 average of $1.28, which has a standard deviation of $2.01.
For the prior week, the basis was a positive $10.42 against a five-year average of $1.28, which had a standard deviation of $2.01.
In the same week last year, the basis was a minus $0.60, meaning futures were above cash by $0.60. In the 2014 week, the basis was a positive $3.60.
And the five-year average basis doesn’t get any better for traders in coming weeks. This week’s average basis is a plus $0.32, followed by a plus $0.41. Then the basis goes negative for the rest of August.
IMPLICATIONS
The threat of delivery against the futures contract always hangs over the heads of speculators. This threat is reduced or eliminated when the cash price is above the futures price since producers can get more for their livestock by selling into the cash market.
Delivery isn’t a big threat at this time, but there are other implications to a wide positive basis.
Cattle feeders use historical basis data, including the standard deviation, to hedge their cattle. Since they can’t tell the future, the best indicator of the eventual price of their fed cattle when they reach market weight and finish is the futures market plus or minus the standard deviation. In effect, they are making an educated guess about the eventual price of their finished cattle.
If the basis at the time of sale to the packer is higher than what was estimated at the time they were placed on feed and hedged, the actual price received by the feeder after the fat cattle are sold and the hedge is lifted is higher than the estimated price. This basis advantage can be augmented by lifting the hedge a couple of weeks before or after sale to the packer, depending on which direction futures are expected to move.
That helps explain why feeders are pulling cattle forward for packer sale. The wide positive basis is too attractive to ignore, and the historical basis for cattle hedged against Oct is negative.
The market says “sell fats now.”
CASH CATTLE MARKET QUIET
Cash cattle markets Tuesday were quiet with light bidding at $185 per cwt in Nebraska’s dressed market. Asking prices range from $188 to $190 dressed and $120 on a live basis.
Cash markets last week traded at $115 live and at mostly $185 dressed with some in Iowa at $184.
The USDA’s choice cutout Tuesday was $1.34 per cwt higher at $199.93, while select was up $1.38 at $190.82. The choice/select spread narrowed to $9.11 from $9.15 with 114 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Monday was $138.61 per cwt, down $0.54. This compares with the Aug settlement Tuesday of $142.45, up $0.75.