Some Feeders Can Access Positive Basis Returns

Some cattle feeders currently are able to take advantage of the current difference between cash prices for fed cattle and the Jun or Aug futures price, or the basis.  Others are not.  It all depends on how well hedged they are.

University of Tennessee Agricultural economist Andrew Griffith said it well in his weekly letter to Extension agents when he said, “The story in the finished cattle market continues to be the strong basis where live cash prices are trading $5 to $6 higher than June live cattle futures.  For cattle feeders that hedged the sale of these cattle prior to April 23rd, the positive basis is a money-making proposition as the futures hedge will have protected against the huge futures price decline and cattle feeders are capturing the value in the positive basis.

“At the same time, the positive basis provides good reason to stay current with marketings, which will keep pulling cattle through the system,” Griffith said.  “For those that went unhedged, margins on cattle closeouts are most likely in the red and only declining further as feed prices escalate.”

 

BASIS NEAR HISTORIC AVERAGES

 

However, the weekly average basis is not out of line with historic levels, according to USDA data on western Kansas fed steers and the CME Group’s live cattle futures prices that are compiled by the Livestock Marketing Information Center.

Last week, the western Kansas fed steer basis was a positive $1.32 per cwt over the Jun, the data showed.  This means cash fed steer prices averaged $1.32 per cwt more than the Jun futures contract.

And the average basis with the Aug contract was a positive $5.43 per cwt.

Any time there is a positive basis, there are few, if any, deliveries against the futures contract since it pays feeders to sell cattle into the cash market rather than take the futures price.  Hedged feeders then can rebuy, or cover, their sale of cattle into the futures market at a price that is lower than where they sold the cattle to the packer, or cover their short hedge.

Comparing last week’s basis with the 2013-2017 average Jun basis for that week shows that the five-year average basis for the week was $3.06 per cwt, well above last week’s $1.32.  And last week’s basis with the five-year average for the Aug contract was even closer at a positive $5.88 per cwt.

 

THIS WEEK’S BASIS REMAINS POSITIVE

 

This week’s historic basis levels remain positive.  For the Jun contract, the 2013-17 average basis is $1.25 per cwt, and for the Aug contract it is a positive $4.44 per cwt.

After that, the average basis with the Jun contract slips to a minus $0.13 per cwt, while the average basis with the Aug contract dips to a positive $2.17, and the basis in subsequent weeks remains positive through the month.

 

CATTLE, BEEF RECAP

 

Cash cattle trading took place last week at $112 to $114 per cwt on a live basis, steady with the previous week’s action, and at $184 to $186 dressed, steady to up $2.

The USDA choice cutout Tuesday was down $1.29 per cwt at $220.53, while select was down $0.71 at $201.80.  The choice/select spread narrowed to $18.73 from $19.31 with 105 loads of fabricated product sold into the spot market.

No contract delivery notices were served for the Jun live cattle futures contract Tuesday.

The CME Feeder Cattle index for the seven days ended Monday was $133.21 per cwt, down $0.34 from the previous day.  This compares with Tuesday’s Aug contract settlement of $137.25, up $0.32.