Unless things change, there are likely to be few, if any cattle deliveries against the Apr live cattle futures contract.
The basis, or the difference between the cash price and the expiring futures price, is too narrow for many producers to go to the trouble and expense of delivering against the futures contract. In short, the futures and cash markets have done what they were designed to do – come together at the end of a contract’s life, or “converge.”
The average weekly basis against the Apr contract for fed steers in Kansas through the week ended March 16 was a minus $0.80 per cwt, according to calculations by the Livestock Marketing Information Center using USDA Agricultural Marketing Service data.
THE RULE OF THUMB
As a rule-of-thumb, that is too close to make it profitable for cattle feeders to deliver against the futures contract. Most would like to see the basis be at least a minus $1.50 before considering going through the delivery process.
However, that does not mean that some individual cattle feeder somewhere won’t consider delivering against his or her hedged cattle position. After all, a local price could be enough different than the average price to make it “pencil out.”
But such a scenario is unlikely.
While the average Kansas weekly fed cattle price used by the LMIC to calculate the basis or the average Apr futures price may be out of normal parameters, making delivery not feasible only in the near term. Again, the Kansas steer basis figured by the LMIC for two weeks ago was a minus $0.80 per cwt, yet the 2013-2017 average basis for that week was a positive $3.42, against that rule-of-thumb figure of a minus $1.50.
What that says, is that if things change, history would say they would move against making delivery.
THE WEATHER MAY NOT AGREE
But the weather may have something to say about things.
There is a widespread and growing belief among futures traders that the harsh winter followed by the incredible flooding in Nebraska and along the Missouri River Valley could have caused many cattle to slow their growth or fattening process in an effort to stay alive.
If that is true, and news reaches the highly volatile futures trader, speculative buying of live cattle futures could push the Apr futures contract high enough to make fed cattle deliveries feasible for some feeders.
The theory goes that contracts for beef from retail grocers or restaurants to packers, many of which are made months ago, may specify a certain level of USDA-Grade choice beef in the order. Now if the weather were severe enough to cause cattle going through it to use their feed energy to survive rather than to lay in the fat marbling necessary for choice or prime grading, the bidding for cattle worthy of being delivered against the futures contract could intensify.
Stay tuned.
CATTLE, BEEF RECAP
The USDA reports cash cattle sales at $125 to $126 per cwt on a live basis, down $2 to $4 from last week. Dressed-basis sales were slim at $206 to $208, steady to up $1.
The USDA choice cutout Thursday was down $1.55 per cwt at $227.44, while select was off $1.01 at $219.52. The choice/select spread narrowed to $7.92 from $8.46 with 76 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Wednesday, was $142.35 per cwt, up $0.20. This compares with Thursday’s Mar contract settlement of $141.97, down $0.15, and the Apr contract settlement of $145.95, up $0.05.