Cattle Futures Pressure Cash

Cash fed cattle prices are being pressured by live cattle futures as the Aug contract nears its last trading day on the 31st.

Futures markets are designed to converge with cash markets by the time the nearest futures contract reaches its last trading day, in this case, Aug. 31.

Deliveries of live, slaughter-ready cattle to fulfill the Aug contract’s obligations have not occurred this month because the cash market cattle price has been much greater than the futures price.  This means cattle hedgers will take in more money by selling cattle in the cash market and buying back, or lifting, their futures hedge than they would by delivering against the futures contract.

 

BACKGROUND

 

The difference between the cash price and the relevant futures price is called the basis and by common use is described as the cash price minus the futures price.  The basis can vary by the location of the cattle being considered for delivery, but the principle is the same across the continent.

Many cattle feeders will never deliver on a futures contract even though the contract’s specifications are written to accommodate as many fed cattle as possible.  The need to maintain a standard contract in the midst of a sea of not-quite-standard cattle sometimes makes it difficult for feeders to put together a group of 29 to 30 cattle that will fulfill the futures contract requirements.  Many also find the distance to designated delivery points too great, and still others find the whole process to be distasteful and inconvenient.

But they will hedge their cattle against the futures market, using the average basis or the standard deviation as a means of determining a finished price for their hedged cattle.

 

NOW THE NUMBERS

 

The weekly basis for Kansas fed cattle is kept and published by the Livestock Marketing Information Center and has been especially prohibitive for futures deliveries for the whole month.  Last week, the basis stood at a plus $2.36 when many consider a basis of a minus $1.50 a reasonable rule of thumb for considering delivery on a futures contract.

The 2010-2014 average basis for last week was a plus $0.72 with a standard deviation of $2.30.  For this week, the basis is a plus $0.33 with a standard deviation of $1.70.

That means last week’s cash price of mostly $119 per cwt on a live basis should have meant an Aug futures price of about $117.30 to $118.28, yet the contract settled Friday at $116.32.  Either the cash market has to decline or futures have to come up for normal convergence to occur.

However, Aug futures are moving lower after failing to penetrate the last cycle high of $117.75 on Aug. 5, 8 and 9.  This puts even more pressure on cash markets, despite market strength the last couple of weeks.

The situation also supports futures in that hedged feeders will be more willing sellers because a wide basis allows them to pick up a few extra dollars when they lift their hedges.

 

CASH CATTLE MARKETS QUIET

 

Cash cattle markets Tuesday were quiet with bids at $118 per cwt on a live basis after trading steady to lower last week at $118 to mostly $119 and at 187 on a dressed basis, down $1 to $3.

The USDA’s choice cutout Tuesday was $0.17 per cwt higher at $201.84, while select was off $1.51 at $192.67.  The choice/select spread widened to $9.17 from $7.49 with 133 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Monday was $149.o3 per cwt, down $0.48.  This compares with the Aug settlement Tuesday of $147.12, down $1.52.