Live Cattle Basis and Why it Matters

Decoding the Cattle Market Dance: Understanding Live Cattle Basis and its Impact on Cattle Producers

Most cattle producers have always known that the market price of cattle can fluctuate based on supply and demand, quality, and location. However, many producers don’t understand the interaction between the cash market and futures market, which is "live cattle basis," Most cattle producers would admit, that they are quite confused about what it meant and how it could impact their business.

Live cattle basis refers to the difference between the cash price of live cattle and the futures price of cattle on a specific date. The futures price is the price at which cattle are traded on the futures market while the cash price is the price at which cattle are sold in the physical market. The difference between these two prices is the basis.  Basis is a simple math equation.  It is the spot live cattle cash price minus the futures price.

As a cattle producer, the live cattle basis can directly impact my business. When the basis is high, it means that the futures market is bullish, and prices are expected to rise in the future. This could be an excellent opportunity for me to sell my cattle and make a profit. On the other hand, when the basis is low, it suggests that the futures market is bearish, and prices are expected to fall. In such cases, I may choose to wait until the basis improves before selling my cattle.

The live cattle basis is influenced by several factors, such as supply and demand, quality, and location. When the supply of live cattle is high, the basis tends to be lower since there is an oversupply of cattle in the market.On the other hand, when the supply of live cattle is low, the basis tends to be higher since there is a shortage of cattle in the market. The quality of the cattle also plays a role in determining the basis. Cattle that are of high quality tends to have a higher basis since they are in high demand, while cattle of poor quality tend to have a lower basis since there is less demand for these types of cattle. Location is another factor that influences the live cattle basis. The basis can vary depending on where the cattle is located since transportation costs and other factors can influence the price.

"As a cattle producer, I need to keep track of the live cattle basis to make informed decisions about when to sell my cattle. However, I must also understand that the basis is just one of many factors that determine the market price of cattle. Other factors such as weather, feed prices, and government policies can also impact the price of cattle." ~Tom Fanning, Manager


Maximizing Profits: The Intricate Dance of Live Cattle Basis - How Timing Your Sales Can Add Dollars to Your Bottom Line

The week of 4/24 April Live Cattle Average Price was $178.61, and the April Futures price of $175.15 gives us a basis of $+3.46. With the April Live Cattle expiring and the June Live Cattle contract being the lead month, the first week of May begins the transition. June Live Cattle traded on Tuesday 5/2 at $162.90 with cash cattle trading at $172 and Wednesday 5/3, the June Futures closed at $161.65 with more Cash cattle trading at $172 so the basis for Tuesday traders was $+9.10 and with the futures lower and cash steady $172 the basis improved to $+10.35.  For the cattle owners who sold on Wednesday 5/3 they were able to put an additional $1.35 per cwt in their pocket.  This adds approximately $15-$17 per head to the bottom line.

Mastering the Market Dance: Unlocking the Power of Live Cattle Basis for Informed Decisions and Profitable Outcomes in the Livestock Industry

In conclusion, live cattle basis is an essential market indicator that helps traders and producers forecast future prices and make informed decisions. As a cattle farmer, I must understand the factors that influence the basis and keep track of it to make informed decisions about when to sell my cattle. By doing so, I can navigate the livestock market more effectively and make better decisions for my business.

- Tom Fanning


CME Group

June 8, 2023
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