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Fed cattle basis dynamic, changing

Fed cattle basis dynamic, changing
Expect the fed cattle basis to remain volatile as the industry adjusts to plant closures.

Tyson’s mid-August announcement to close its Denison, Iowa, plant represents an important development for the beef industry. Tight cattle supplies in recent years have exacerbated relative overcapacity within the industry, and short cattle numbers are what rang the death knell for the Denison plant. Tyson is thus opting to jump out of competing for cattle in the area.  

The move will likely influence differences among the regional fed cattle markets going forward. With that in mind, it’s important to review regional price differences over time. The graph represents regional fed price deviations (basis Nebraska) over time. 

It’s important to note those price differences were relatively consistent between 2004 and 2011. During that time, positive basis in the southern region occurred during the early part of the year and subsequently diminished as the market transitioned into spring. The seasonal premium in the south became larger in the winter with the normal waning of fed cattle supply; excess packing capacity in the south drove the market higher in order to pull cattle into the region. That price difference proportionally declined as fed cattle supply increased into late spring and early summer.weekly basis

The southern basis peaked in March 2010, as indicated on the graph. However, that long-run pattern unexpectedly shifted in 2011—the southern premium not only disappeared but inverted, with the northern market largely outperforming the southern market ever since. The southern discount reached a low point in May 2014. And while it’s somewhat normalized during the past year, southern basis has remained negative.  

Clearly, closure of the Denison plant will influence regional market differences going forward, however, to what extent remains to be seen. How big of a difference do you perceive the plant’s closure will make in the future? Will the market revert back to its old pattern or will the regional differences remain as they are? Either way, what effect might that have on the feeding sector over time?   

Leave your thoughts in the comments section below.   

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