THE DIFFERENCE BETWEEN THE CASH FEEDER CATTLE MARKET and the feeder cattle futures market is defined as basis.
The same calculation can be done with the cash fed cattle market and live cattle futures, but the focus of this article is on feeder cattle basis. This is the second in a 3-part series on how cattle producers can enhance their risk management plan.
Knowing your basis for the cattle you intend to market is very useful if you plan to manage price risk, and it is also useful if you are marketing cattle for spot delivery or forward delivery.
The flow of feeder cattle moves toward the central plains region of the U.S. The core of the cattle feeding segment is from the Texas Panhandle north into
Knowing this is the core of the feeding segment makes understanding basis easier. Basis is defined as cash minus futures, using your local cash market, or the market where you are selling the cattle.
Basis is a makeup of freight, quality, size, sex and economic conditions. Assuming the quality, size and sex of the cattle are constant, basis is not the exact same every single year due to freight costs and economic conditions for those buying the cattle.
One of the variables affecting basis is transportation. As an example, if the same quality, sex and size of animal was being marketed out of the Amarillo region versus the
The higher quality of the animal being sold is typically correlated with basis in the sense that the cattle will not be discounted as much in comparison to a lesser-quality animal.
Quality is a matter of opinion, and the only opinion that matters is the buyer's when it comes to basis. Sellers must be realistic with their evaluation of quality for their cattle.
The last variable that can impact basis is economic conditions.
Historically, when the cattle feeding segment is not profitable for extended periods of time, they attempt to buy feeder cattle at a bigger discount than when they have been profitable for a long period of time.
The swing in equity for cattle feeders should be closely monitored because of the impact it can have on feeder cattle basis.
There might not be much the seller can do about the wider basis due to the cattle feeding segment losing money, but knowing that it is a risk can be valuable and eliminate any surprise.
The feeder cattle futures contract is based on a 650- to 849-pound steer in the 12-state central plains region, or an average of a 750-pound steer.
Typically, the heavier weight cattle carry more discounts than the lighter weight cattle. Heifers carry more discounts than steers. These are both important variables to understand in terms of calculating basis for your own cattle. It is especially important to know that using the feeder cattle futures as a risk management tool for calves can be very difficult, especially cattle to be marketed during the winter and spring months when cattle are typically being purchased to go to grass.
The volatile and unpredictable basis for calves should be fully understood before attempting to use the feeder cattle futures as a means to manage risk or set a price on calves.
Being informed can put at ease some of the fear of volatility with which the industry deals. Producers who know the importance of basis and what factors affect basis levels are better equipped to make informed risk management decisions.
There are resources to assist in understanding basis, and CattleFax is a great resource for producers to use.
Editor's note: CattleFax provides the daily market report to users of The Cattleman NOW and The Cattleman Plus, our smartphone and tablet apps. The analysts at CattleFax are also providing a monthly column to further educate members of
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