Fri, 31 Jan 2014
US - Early in the year, a common marketing practice is to take a look at basis levels, writes Professor Matthew Diersen of North Dakota State.
You never know when subtle changes can slowly derail your price expectations. The focus here is on fed cattle basis, which has a strong seasonal pattern. There are multiple sources of price and basis information. The LMIC has price tables and often individual states have data available.
The most common way to look at fed cattle basis is to compare a monthly cash price for a given market to the nearby futures price.
Typically basis equals the cash price minus the futures price. Such a basis measure would translate directly into a planning price.
Adding an average basis for a given month to its nearby futures price gives an expected cash price. The same can be done with a forward basis. In most months the basis is negative, implying a cash price below the futures price.
This is because of some transactions costs when delivering cattle – regardless of the market. For par delivery locations the transactions costs should be minimized, but may still be $1-2 per cwt.
Because the fed cattle cash price has a strong seasonal pattern based on both production levels and demand for beef, there is also a seasonal pattern in the basis. The seasonal peak often occurs in April, but it can be anywhere from February through May.
Thus, basis for the early half of the year is worth watching every year. A 5-year average basis seems to work pretty well for South Dakota. The average covers enough years to smooth out aberrations, but is short enough to adjust to changing seasonal patterns. Average basis for the coming months are: February at -$3.89, March at -$3.52, April at -$0.52, May at $2.69 and June at $1.34.
The recent rally has pushed up the nearby February contract and the following contract prices decline in price through August.
Thus, for planning purposes, you would want to approach the averages with more caution than usual. February’s basis might still hold, as it reflects typical basis for a delivery month.
March’s basis is more suspect, as it should reflect more of the premium the February futures contract trades at relative to the April futures contract.
May’s basis could be suspect as well, given the very steep slide from the April futures contract to the June futures contract.
The other source to consider is the forward contract market. The USDA’s Agricultural Marketing Service reports the weekly minimum, maximum and average basis levels on contracted fed cattle: http://www.ams.usda.gov/mnreports/lm_ct153.txt
The basis levels last week for February and March were both around -$1.00, while May was about $3.00. The delivery location of the contracted cattle is not given, but the basis levels suggest that the forward market has adjusted to the unusual futures pattern observed this winter.