RANCHING Business
The Importance of Basis
February and March Feeder Cattle Basis For Texas 750/lb. Steer
$0.50 $1.00 $1.50 $2.00 $2.50
By Mike Murphy, CattleFax, Denver
$(1.50) $(1.00) $(0.50) $-
Basis for a 750-pound steer is stronger in late March then early February. Understanding how this impacts your marketing plan is where CattleFax can assist your business decisions. For more information on this type of data please reach out to CattleFax for a membership.
T
HE DIFFERENCE BETWEEN THE CASH FEEDER CATTLE MARKET and the feeder cattle futures market is defi ned 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 fl ow of feeder cattle moves toward the central
plains region of the U.S. The core of the cattle feed- ing segment is from the Texas Panhandle north into Nebraska. Knowing this is the core of the feeding segment
makes understanding basis easier. Basis is defi ned 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 transporta-
tion. As an example, if the same quality, sex and size of animal was being marketed out of the Amarillo re-
tscra.org
gion versus the College Station region, there would be a larger price discount for the animal to be marketed from College Station; this is because of the higher cost to transport that animal to the Panhandle compared to the animal that is in Amarillo. When freight rates increase or decrease, basis levels are impacted. The higher quality of the animal being sold is typi-
cally 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. Sell- ers 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
profi table for extended periods of time, they attempt to buy feeder cattle at a bigger discount than when they have been profi table 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-
February 2014 The Cattleman 45
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