Industry At A Glance: Will volatility continue with fed cattle basis?

Industry At A Glance: Will volatility continue with fed cattle basis?

The fed cattle basis bears watching as volatility continues.

Several months ago, Industry At A Glance focused on the shifting basis pattern within the feeder cattle market. Equally important to market participants, and their day-to-day marketing decisions, is managing the fed cattle basis.

This week’s chart details weekly basis since the fed market bottomed at sub-$80 in December 2009. (Basis defined as USDA’s 5-area weekly steer price less the weekly average for CME’s nearby live cattle contract.) 

Through May 2012, the fed cattle basis remained relatively steady, and in accordance with expectations – seasonally fluctuating between $2 under to $4 over. However, from there, the basis swings occurred more quickly and somewhat unexpectedly, and coupled with higher prices, were more amplified. Since that time, the trading channel largely encompasses a $12 variance from lows to highs – roughly double the magnitude of the prior channel.

Equally important, though, is the changing direction of the basis trend over time. The previous basis trend was mostly flat and predictable – a zero average. Conversely, the current basis trend is moving in an upward channel, also in accordance with higher prices. The moving average during the past year peaked in August at almost $6. Meanwhile, the 26-week moving average has since moderated to $2 over, but remains positive nevertheless, roughly equal to almost $30 per head.    

weekly fed cattle basis

The positive basis scenario during the past year has allowed many sellers to purchase replacements and hedge cattle at a loss, and then subsequently make that up (and then some) at closeout time.  Moreover, the positive basis environment has also fueled the move to feeding cattle to heavier weights.     

The critical question surrounds the direction and magnitude of basis going forward: will the basis trend moderate and ultimately regress back to $0 as supply grows and/or fed cattle demand wanes, or will it remain within the current channel outlined above?

The strategic implications are important from both a marketing and replacement procurement standpoint. Either way, monitoring and managing basis has become ever more important during the past 12 to 15 months for feedyard managers (and the packer, too). 

How do you perceive these trends? What other implications might arise if basis moderates – especially if it happens quickly? Where do you see the basis channel going in the future? 

Leave your thoughts in the comments section below.

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