New Basis Tool

Regional Breakdown a Key to Better Risk Management in Cattle Markets

Victoria G Myers
By  Victoria G. Myers , Progressive Farmer Senior Editor
A five-region basis tool developed by Rabobank will help feeder buyers track supply shifts that occur seasonally. (Image courtesy Rabobank)

Describing feeder cattle futures as the "younger and less attractive sibling" to live cattle contracts, Rabobank's senior analyst Don Close is hoping he can alter the perception, by making basis numbers more engaging.

A new way of looking at the basis, the "Regional Basis Tool" breaks down data from 12 states that make up the CME Index, into five regions. Those regions are: One--Montana and Wyoming; Two--Nebraska, South Dakota and North Dakota; Three--Iowa and Missouri; Four--Kansas and Colorado; and Five--Texas, Oklahoma and New Mexico.

The goal of grouping basis data into regions, is to create a visual representation emphasizing when supply shifts occur seasonally. Close said this will help feeder buyers know when cattle supplies are going to start to shift.

"If feeder cattle buyers see that basis change, and they see the percent of contracts by region change, they can know when they need to shift their buying interests from one area of the country to another," explained Close. He added stockers and backgrounders will also find the information useful, helping them be make sure they have supplies available when a specific region is going to be most in need of feeders.

"This could indicate to a seller he wants to have cattle ready to go at a particular date, or to have sold by a certain time to beat the crowd," explained Close. "So for both buyers and sellers there are a lot of signals coming out of this data that are useful when it comes to scheduling business decisions."

Ultimately Close said they hope a new focus on these feeder index numbers will underscore their value to the market, and bring in more data.

"Our first goal would be to see more numbers of cattle picked up in the feeder index," he stressed. "Then we want to drop cattle descriptors and get more numbers of better quality cattle in the index. Ultimately that would elevate prices because we'd be looking at more high quality cattle in the mix."

He explained that while there have been changes in the weight categories, with steers weighing 700 to 899 pounds, there have been no real changes in quality requirements.

"Incorporating more high-quality cattle into the price calculation would avoid the quality spread between the live cattle contract and the feeder contract from eroding," according to Close's report.

Close explained one of the things they are using the Regional Basis Tool to show is that the cattle making up the CME Index are not equally distributed geographically. That should be a consideration for producers who want to establish hedging programs.

He reported within a marketing year the share of cattle from Region One, for example, accounts for 5% to 10% of the cattle in the CME Index. Region Two accounts for as much as 40% in January and February; but declines to 10% to 20% for the rest of the year. Region Three is at 15% to 20% most of the year, but spikes in July and can hit 30%. Region Four is stable at 10% from January to June, then dips to about 5% for June and July; spiking to 25% to 30% in August and dipping to 10% for the rest of the year. Region Five holds about 20% of the supply in January; increases to 40% in March and April; goes to a peak of 60% in May and June and tapers off to 40% to 50% for November and December. He said the overwhelming share of cattle in the index comes from Region Five.

Close concluded their analysis of feeder basis data underscored the importance of knowing if a basis is strong, neutral or weak before building a market strategy. The basis is determined by taking the local cash price, and subtracting the futures price. Using at least 10 years as a guide, Close advised sorting basis outcomes into strong, middle-range and weak classifications, and then use market performance data from similar years.

Victoria Myers