The live cattle basis isn’t allowing much of a hedging window for cattle futures currently.
The basis is the difference between cash and futures markets, calculated by subtracting futures prices from cash prices. When the result is a positive number, it means cash prices are higher than the futures delivery month in question, and when the result is negative, futures prices are higher, resulting in a better hedging possibility.
Cash cattle traded steady to $1 per cwt lower on a live basis last week in a range from $111 to $116, mostly $114 to $116, and a few traded on Monday this week in Iowa at $114.
However, the futures market doesn’t allow a good hedge against a price drop until the Feb or Apr delivery months with prices in Chicago trading from about $107 to $112 through Dec, and even the Feb contract is only about $116.
HIGHER FUTURES JUST WISHFUL THINKING?
The conundrum for many is that the futures market is their best barometer of future cash prices. It is the net sum of what traders think prices will be like in those future delivery months. Nobody knows for sure, but cattle feeders certainly aren’t willing to sell into the futures market when it guarantees them a lower price.
That is, unless that lower price still is higher than their cost of producing a slaughter-ready steer or heifer and they feel prices will only get softer by the time calves placed on feed today are ready for the packing plant.
Such a scenario might be possible, but one analyst said it’d be hard to imagine a feeder wanting to hedge cattle at a lower price than is currently available in the cash market, especially when estimates show they are making a positive margin on unhedged cattle currently.
That basis could go negative, and many traders were said to think the futures market has a chance to gain some steam in November and December, but who knows?
POSITIVE BASIS SHOULD PUSH SLAUGHTER
A positive basis, can be expected to push slaughter rates, all things being equal, but this doesn’t seem to be the case currently, although feedlots are said to be current with their scheduled marketings to packers.
Fed cattle slaughter has been holding above the 2013-2017 average all year, according to USDA figures compiled by the Livestock Marketing Information Center. But the gain is mostly cows and heifers as steer slaughter has held near last year and the previous five-year average.
What may be keeping cattle on feed until they are really ready for slaughter is a wide spread between choice and select beef, which makes packer buyers more interested in slightly fatter cattle.
CATTLE, BEEF RECAP
Cash cattle traded in Iowa Monday at $114 per cwt on a live basis, steady to down $2 from last week.
Cattle traded in the Plains last week at $111 per cwt on a live basis, down $1 from the previous week, and at $114 to $116 in Nebraska, steady to down $1. Dressed-basis trading occurred at $183 to $185 per cwt, steady to up $2.
The USDA choice cutout Thursday was up $0.39 per cwt at $216.88, while select was off $0.34 at $192.37. The choice/select spread widened to $24.51 from $23.78 with 83 loads of fabricated product sold into the spot market.
No cattle were tendered for delivery against the Aug contract Thursday.
The CME Feeder Cattle index for the seven days ended Wednesday was $141.86 per cwt, up $0.25 from the previous day. This compares with Thursday’s Aug contract settlement of $139.85, up $0.30.