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Live Cattle Basis

By Matthew Diersen
 
The beginning of the year brings an opportunity to update and analyze basis data. Basis, the difference between cash and futures prices, can be tracked and used to forecast local cash prices when hedging. For live cattle, basis is usually computed versus the nearby contract throughout the year. Thus, January and February cash prices are compared to February futures prices. The LMIC has historic tables for several large feedlot states. What follows is a detailed look at the basis levels for South Dakota from 2019 and implications for marketing in 2020.
 
The process for computing the average cash prices changed with the advent of the MyMarketNews interface at USDA-AMS. The Sioux Falls Regional Livestock Auction in Worthing, SD switched over to the new system in early May of 2019. Before then, there was a weekly range of prices for Choice 2-4 steers. The mid-point of the old series was computed from the monthly range to arrive at cash prices for January through April. Since the change there is a more detailed list of head, weights, and prices sold at different classes, yield grades and quality grades.
 
Under the MyMarketNews system, it is possible to obtain detailed historic data. Begin by searching the database and entering the report of interest. Then select the period of interest; here all the available weeks in 2019 were selected. The full data set was then downloaded to Excel. There were almost 2,000 rows of data, reduced to 56 after isolating only steers grading Choice, average dressing, with no distinguishing lot description, and with yield grades of 2-3, 2-4 and 3-4, which effectively spans the quality grade used in recent years for comparison purposes. There were 22,581 head meeting those criteria, or 73% of the total. The futures contract currently reflects a mix of 65% Choice and 35% Select steers or heifers with yield grade of 3. Thus, additional price comparisons are now more readily available. For example, a basis specific to heifers may be informative as its seasonal pattern may vary. A cursory look suggests that steers at this location commonly graded Choice 2-3, while heifer sales volumes were lower and they more commonly graded Choice 2-4.
 
The simple average of the weekly weighted-averages was used to compute a monthly price for May through December, again similar to recent years. The nearby futures prices, averaged monthly, were obtained from the LMIC. In December, for example, the cash price was $117.58 per cwt in South Dakota, while the nearby futures price averaged $121.72 per cwt. Thus, the basis was $-4.14 per cwt in December. The general basis pattern in 2019 was fairly typical. The basis was negative for January through March, positive from April through September, then negative again from October through December. Compared to the prior five-year average levels, the basis was a little lower than average in five months and a little higher than average in seven months. Basis has larger swings, and is less predictable, in the odd (non-settlement) months.
 
Updating the average basis levels and conservatively rounding down suggests the following basis estimates (per cwt for steers) for 2020 in South Dakota: January $-2, February $-3, March $2, April $2, May $9, June $1, July $3, August $0, September $-2, October $-3, November $-4 and December $-4. The May estimate is heavily influenced by the unusually high basis in 2018.
 
Source : osu.edu