Strong Fed Cattle Basis

June 19, 2014 02:34 AM
Strong Fed Cattle Basis

The fed cattle market continues to be profitable despite ending the month of May on a lower point.
By: Darrell Mark, SDSU Economics Adjunct Professor

Fed cattle prices drifted lower during May and finished the month almost $10/cwt lower than their spring peak established in late March. Nonetheless, prices have been quite resilient and continue to trade in the mid-$140s on a live weight basis. Fed cattle basis (cash prices minus futures prices) has also been much higher than average, despite the normal peak in basis seasonally occurring in May. As shown in Figure 1, fed cattle basis, as measured using Nebraska weekly weighted average cash prices and weekly average nearby futures prices, was $7.70/cwt during the last week of May. That’s $3.65/cwt higher than the previous three-year average for the last week of May.

Nebraska fed cattle basis has dropped over $3/cwt since its yearly high (and near record high) earlier in May. However, as shown in Figure 1, basis has been higher than the previous three-year average and maximum most of this year. Several factors have contributed to the stronger-than-normal basis this year. Federally inspected steer and heifer slaughter is down over 3% year-to-date due to overall tight cattle supplies. Not only are fed cattle supplies down, but the available supply of market ready cattle has shrunk even more. So far this year, the number of cattle that have been on feed for more than 120 days has averaged almost 14% below 2013. Thus, packers have had to bid on cash cattle aggressively at times to meet relatively good demand for beef. Another factor causing the strong basis this year is the reluctance of traders in the futures market to continuously bid futures prices higher. At record high prices, there appears to be some skepticism on the part of futures traders that prices will continue to go higher. So, futures prices have some risk premium bid into them (in terms of lower prices) as traders are cautious about extending long positions in the market.

The strong basis encourages feedyard operators who have hedged cattle to continue to market them as soon as possible. This is one reason why steer weights have not increased much over a year ago despite lower feeding cost of gain. Looking ahead, this should help support basis in the next several weeks as closeouts would have been hedged at a profit and the strong basis further improves those profits. However, by mid- to late-summer, basis may return to more normal seasonal levels as the lightweight feeder cattle that were aggressively placed earlier this year begin to come to market.

Nebraska Choice Steers

The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.

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