The feeder cattle basis in South Dakota has been wide throughout 2013. Basis, defined as the cash price minus the nearby futures price, is typically positive in South Dakota with a slight seasonal pattern (Figure 1). The wide basis has been bad news for sellers utilizing a futures hedge as a pricing strategy in recent months. Feedlots, as buyers, may have benefited if they hedged feeders. In June the basis was very wide, reflecting the comparison to the distant August futures price.
The basis is not wide because of any regional or quality concerns. The difference between the South Dakota feeder prices and the CME Feeder Cattle Index prices has been similar to other years. Thus, the basis will likely revert back to historical levels for the second half of 2013.
The Economic Research Service (ERS) sharply lowered the feeder cattle price projections this month. The price projections for the third quarter are $138-142 per cwt and for the fourth quarter are $148-156 per cwt. For comparison, the November futures contracts have been trading between $155-157 per cwt in mid-July. Anticipating a narrowing basis, and with the futures at the high end of the projection range, forward pricing strategies would currently look better for sellers of feeder cattle than for feedlots.
The stocker basis in South Dakota has followed its seasonal trend compared to the 5-year average, although during the first quarter it was higher than the average and during the second quarter it was lower than the average (Figure 2) The stocker basis will also likely return to more normal levels for the second half of 2013. Stockers in the North Central region sold on recent video auctions with October and November delivery months ranged in price from $158-$190 per cwt. At its average level the auction prices reflect a basis of about $20 per cwt for fall – similar to the 5-year average for South Dakota. Lower corn prices or higher fed cattle prices would both improve the basis.
Despite basis risk for feeders and stockers, producers need to remain aware of the price risk that remains in the market. Price fluctuations can be quite big before November. In recent years the feeder cattle futures price from June through November has increased and decreased by about $10 per cwt. In June the futures price averaged $151.18 – so major changes may still occur in its level by November. Locking in a price using a forward contract is the only way to eliminate both risks, but basis should be in the producers favor when making that choice.