Caldwell Livestock banner_10-14-19
Advertise With Us Subscribe Today Facebook
SouthernLivestock.com
Not a member? Membership has its privileges— Register today! • Make SLS your homepage!
home articles Marketing |

The impact of basis in fed cattle

published: September 18th 2019
by: Josh Maples, Assistant Professor & E
source: Mississippi State University

Changes in basis influence returns from hedging using the futures market. Hedgers swap price risk for basis risk and for those selling cattle, a positive basis means more money. Using a simplified example, assume a manager purchased a group of steers in March 2019 with plans to feed for 6 months and immediately hedged by selling an October 2019 Live cattle futures contract which was trading at $116 at the time. After that point, prices going down helps them in their futures position but hurts them in their cash position – hence they are hedged against the impact of price changes.

If this manager sold their steers last week and offset (bought back) their futures contract, they would have made $18.24 per CWT in the futures market ($116 – $97.76 = $18.24) but of course their cash cattle were worth much less than they were in March and they sold them for only $101.73 per CWT. Adding the $18.24 made in the futures market to the $101.73 from selling the fed steers and this manager earned $119.97 per CWT for the steers. This is $3.97 more than the futures price “locked-in” back in March ($119.97 – $116 = $3.97). This improvement over the locked-in price is due to the positive basis last week.

Ok, that’s enough textbook stuff – why does this matter? Live cattle basis has been positive since mid-April 2019 using weekly nearby futures averages and weekly fed steer averages. This means that hedgers closing out in these weeks generally took home more than what they originally “locked-in.” Conversely, from September 2018 through March 2019, basis was negative for 28 out of 32 weeks which means hedgers generally took home less than their lock-in price. This shows that there is still risk in hedging – but the range (distribution) of basis risk is usually not as wide as the range of price risk.

Strong basis can help pull cattle through the supply chain even at low prices because producers who hedged their cattle want to take advantage of the additional revenue that larger basis provides. That is likely the case in recent weeks even as fed prices have deteriorated.

Site:   Home   Publications   Market Reports   Sale Reports   Sale Calendar   Cattle & Service Directory   Full Commodities Report   Services   About Us   Contact Us

Article Categories:   All   Industry News   Herd Health   Feed & Nutrition   Pastures & Forages   Reproduction   Marketing   Columnists   Production   Genetics & Performance   Weather Forecast   Breed News   Producer Feature Stories   Items of Interest   New Products   Recipes

User:   Login   Logout   Register/Profile   Submit Market Report   Submit Sale Report