ESO 992 ' i THE BASIS FOR FED CATTLE AND FEEDER CATTLE IN OHIO, July 1978 - June 1982 by Carl Zulauf Brian Watkins Carl Zimmerman* February 1983 * Carl Zulauf is assistant professor of Agricultural Economics, The Ohio State University. Brian Watkins and Carl Zimmerman are current undergraduate students, Ohio State. The authors wish to thank Kathy Mattfeld for her typing and editorial services, Allan Lines for his assistance in collecting the data, and the Chicago Board of Trade for their financial support.
THE BASIS FOR FED CATTLE AND FEEDER CATTLE IN OHIO, July 1978 - June 1982 by Carl Zulauf, Brian Watkins, and Carl Zimmerman The trading of fed and feeder cattle futures presents Ohio cattle producers with the opportunity to hedge their production. When a producer hedges his production, he sells a futures contract, usually the one closest to but following the expected date on which the cattle will be sold. Normally, to complete the hedge, the futures contract is bought back when the fed or feeder cattle are sold. The price resulting from this production hedge equals the futures price at whic~ the hedge was placed, minus the futures price at which the hedge was lifted, plus the cash price at which the cattle were sold. Subtracting the cost of production from this price yields the profit or loss from raising the fed or feeder cattle. A slightly different.view of the price resulting from the production hedge can be obtained when it is recognized that the futures price at which the hedge was lifted minus the cash price received for the cattle equals the basis. Thus, the price resulting from the production hedge also equals the futures price at which the hedge was placed minus the basis. Consequently, once the production hedge is placed, the basis is the only unknown in determining the price received for the hedged fed or feeder cattle production. The basis is not constant but varies from year to year for the same day. Therefore, the price resulting from a production hedge is never known until the hedge is closed out. However, at the time the decision to hedge is being made, a producer needs some idea of what the basis will be when the fed or feeder cattle are to be sold. Otherwise, an indication of the price and therefore profit which results from the production hedge cannot be formed.
2 Without this indication, the decision to hedge cannot be made on sound economic evidence. DATA Generally, the best indicator of what the basis will be on the date the cattle are expected to be sold is the average of past bases for that date. A recent study at The Ohio State University has compiled an average fed and feeder cattle basis for Ohio over the period July 1978 through June 1982. For fed cattle, the cash price used was that reported for the Washington Court House auction. This auction, whlch is held on Tuesday, generally has one of the largest fed cattle runs in the state. The specific cash fed cattle price used was the high quote on the price range for U.S. choice and prime, number 2-4, 900 pounds plus slaughte~ steers. For the futures price, the opening Tuesday quote at the Chicago Mercantile Exchange (CME) for the nearby futures was used. The basts was therefore calculated as the opening nearby futures price on Tuesday minus the corresponding cash price at Washington Court House. For feeder cattle, the cash price was obtained from the Kentucky feeder cattle market. This market was chosen because it is the closest market to Ohio in which a substantial number of feeder cattle are traded. Within Ohio, too few feeder cattle are traded to lend any reliability to the prices quoted. The only price available from the Kentucky feeder cattle market was a weekly price range. Therefore, the average of the weekly price range was used as the cash price. The sped.fie price range selected was that for 500-600 pound, meditun frame number two feeder cattle. The futures price used was the opening CME quote for the nearby futures on Wednesday (or nearest available
3 date). This futures quote was chosen because, being the mid-week opening futures quote, it approximates the average of the weekly price range for futures. To summarize, the basis for feeder cattle was calculated as the opening nearby futures price on Wednesday minus the average of the weekly price range for Kentucky feeder cattle. Lack of trading volume on the CME's feeder cattle contracts and lack of a consistent price series for fed cattle markets in Ohio precluded the calculation of basis values before July 1978. Given the data available, the average bases were calculated by grouping into four weekly time periods the Tuesday observations on the fed cattle basis and Wednesday observations on the feeder cattle basis. The weekly time periods were days 1-7, 8-14, 15-21, and 22-31 of a month. If two observations fell in the 22-31 period, the average of these two observations was used as the weekly observation. Thus, a cash basis was computed for 48 weekly time periods. Fed cattle futures are traded for delivery in January, February, April, June, August, October, and December while feeder cattle futures are traded for delivery in January, March, April, May, August, September, October, and November. In both cases the January futures prices were not used because of light trading volume. Consequently, to calculate a continuous nearby basis six contract changes were necessary for fed cattle and seven for feeder cattle. These changes were made during the third weekly period of the delivery month for each futures contract. RESULTS The average bases for the 48 weekly time periods are presented graphically for fed cattle in Figure 1 and for feeder cattle in Figure 2. The
!+ Figure 1: Average Futures - Cash Basis for Fed Cattle, Washington Court House, Ohio; July 1978 - June 1982... MONTH.JAN FEB MAR APR MAY JUN JUL AU OCT NOV I DECI BAS I Sa 9 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 acash price used was the high quote on the price range for U.S. choice and prime, number 2-4, 900 pounds plus slaughter steers. Futures price used was the opening quote for the nearby futures on Tuesday. Basis equals nearby futures minus cash. The Tuesday observations were grouped into four weekly time periods to allow calculation of an average. These periods were days 1-7, 8-14, 15-21, and 22-31 of a month. The nearby futures was changed during the third weekly period of each delivery month. Sources: Chicago Mercantile Exchange Yearbook, 1978/79-1981. Ohio Federal-State Newsletter, July 1978-June 1982. Wall Street Journal, January 1982-June 1982.
5 Figure 2: Average Futures - Cash Basis for Feeder Cattle, Kentucky, July 1978 - June 1982 MONTH BASIS a 9 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 acash price used was the average of the weekly price range for 500-600 pound, medium frame no. 2 feeder cattle. Futures price used was the opening quote for the nearby futures on Wednesday or the nearest available date. Basis equals nearby futures minus cash. The Wednesday observations were grouped into four weekly time periods to allow calculation of an average. These periods were days 1-7, 8-14, 15-21, and 22-31 of a month. The nearby futures was changed during the third weekly period of each delivery month. Sources: Chicago Mercantile Exchange Yearbook, 1978/79-81. Ohio Federal-State Newsletter, July 1978-June 1982. Wall Street Journal, January 1982-June 1982.
6 numerical values of the average bases for fed and feeder cattle are presented in Appendix Tables 1 and 2 respectively while the individual weekly observations over the study period are presented in Appendix Tables 3-8. Both the fed and feeder cattle bases exhibited distinct seasoual patterns. For fed cattle, on average, the futures price exceeded the cash price or was nearly equal to the cash price from late February through June. During the remainder of the year the cash price exceeded the futures price. This finding is consistent with the observation that Ohio is basically a net importer of beef. Thus, to encourage imports Ohio's price (the cash price) must exceed the national price (the futures price). Also, note that the basis seasonal is very similar to the seasonal in choice fed beef cash prices. For feeder cattle the futures exceeded the cash by the largest amount during late November and December. In contrast, cash exceeded the futures by the largest amount in May, June, and July. Once again this seasonal tends to follow the seasonal in cash prices. That is, cash prices are depressed (futures minus cash basis becomes more positive) by the increased supply of feeder cattle in the fall due to the end of the grazing season. In turn, cash prices are strengthened (futures minus cash basis becomes more negative) by the increased demand for feeder cattle during the spring and early summer as the greening of the past1rres brings a need for restocking. USE OF THE AVERAGE BASIS By using the average bases presented in Figures 1 and 2 and Appendix Tables 1 and 2, Ohio fed and feeder cattle producers can obtain an indication of the price likely to result from a hedge on their production. To illustrate, consider a fed cattle producer who is deciding whether or not to
7 hedge fed cattle which he expects to sell during the second week of August. The August futures is the contract closest to but following the expected sell date. Assume that this futures is selling for $65/cwt. From Appendix Table 1, the average basis during the second week of August is -$1.17/cwt. That is, on average the cash price exceeded the futures price by $1.17. Thus, to estimate the price likely to result from the production hedge add $1.17 to the futures price of $65. The expected price is therefore $66.17/cwt. Likewise, consider a feeder cattle producer who expects to sell feeder cattle during the second week in February. The March futures is the contract closest to but following the expected sell date. Assuine that this futures is selling for $73/cwt. From Appendix Table 2, the average basis during the second week of February is $2.51/cwt. In other words, on average the feeder cattle cash price was $2.51 less than the futures price. Thus, to estimate the expected price subtract $2.51 from the futures price of $73. The result is $70.49/cwt. Whether those two producers hedge or not depends on their cost of product ion, their view on potential changes in the price of the August futures, and their financial position. However, a decision cannot be made until a reasonable estimate is made of the price likely to result from the hedge. This need is met by using the average of previous bases for the expected sell date. CONCLUSION In conclusion, three points of caution should be noted. First, the averages are based on only four observations. Thus, the averages will likely change, maybe substantially, with new information. Secondly, an average basis only provides an indication of what the basis will be when the hedge is
lifted. The actual basis at the time the hedge is lifted will not usually 8 equal the average. The resulting divergence implies that the price resulting from the production hedge may be more favorable or less favorable than that expected from the average basis. This potential divergence is largest for feeder cattle because the average of the weekly price range instead of a cash price for a given day (Wednesday in this case) was used in calculating the basis. Thirdly, the average bases presented above are not likely to be the average bases faced by a producer in Ohio unless he sells fed cattle at Washington Court House or feeder cattle in Kentucky. The basis varies with the market in which the producer sells. Consequently, each producer should construct his own basis tables. In the meantime, the average basis values presented in Appendix Tables 1 and 2 can serve as a guide in deciding whether to hedge fed or feeder cattle production. REFERENCES Chicago Mercantile Exchange, Yearbook, Chicago, Illinois, 1978/79-1981. Dow Jones and Company, Inc., The Wall Street Journal, midwest edition, selected issues, January 1982-June 1982. Ohio Department of Agriculture, Ohio Federal-State Market Newsletter, 1978-1982.
.... APPENDIX TABLE 1: Average Nearby Futures - Cash Basis for Fed Cattle, Washington Court House, Ohio, July 1978 - June 1982a Month First b Second b Third b Fourth b January -1. 65c -2.40-2.61-2.31 February -1.85-2.08 -.59.19 March.16 71 -.95 -.81 April -.46.41.09 1.43 May.08 -.20-1.13.14 June.03.21 2.84 1.80c July -.83c -1.20-1.20 -.69 August -1.26-1.17-3.18-2.51 September -1.29 -.41 -.61-1. 91 October -1.46-2.05 -.36-1.38 November -.51d -.20.06-1.35 December -1.97-1.55.47-2.6lc a Cash prices used were the high quote on the price range for U.S. choice and prime, number 2-4, 900 pounds plus slaughter steers. Prices were collected from the Washington Court House, Ohio auction. This auction is held weekly on Tuesdays. Futures prices used were the opening quote for the nearby futures on Tuesdays. Fed cattle futures are traded for delivery in January, February, April, June, August, October and December. Because of light trading volume, the January futures prices were not used in the basis calculations. Basis equals futures minus cash. b To allow comparisons across years, the observations were grouped into four periods. The periods were days 1-7, 8-14, 15-21, and 22-31 of a month. If two days fell in the 22-31 period, the average was used as the observation for that weekly period. The nearby futures was changed during the third weekly period of each delivery month. c Data not available for January 1, 1980; July 4, 1978; and December 25., 1979 because they were holidays. No report from Washington Court House for June 29, 1982 and December 23, 1980. Thus, these weeks were excluded from the average. don November 7, 1978 and November 4, 1980; the Chicago Mercantile Exchange was closed for election day. Therefore, the Monday closing futures quote was used as the futures price. '
Sources: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletter, July 1978-June 1982 Wall Street Journal, January 1982-June 1982 0 '""' -
APPENDIX TABLE 2: Average Nearby Futures - Cash Basis for Feeder Cattle, Kentucky, July 1978 - June 1982a Month First b Second b Third b Fourth b January 3.06 2.93 2.67 1.35 February 2.81 2.51 1.18 -.13 March -. 70 1.34 64 -.50 April.57-1.41 1.02-2.84c May -2.05-3.39-3.28 -.92 June -3.14-1.63-2.93-2.06 July -1. 93-3.09-4.16-1.18 August 7.41 -.50 -.56 -.96 September.49.52 1.24 -.63 October.38-1.25 1.26 2.36 November 1.97 2.33 7.81 4.97 d December 7.48 7.89 4.55 acash price used was the average of the weekly price range for Kentucky feeder cattle market: 500-600 pound, medium frame no. 2 feeder cattle. Futures prices used were the opening quotes for the nearby futures on Wednesday or the nearest available date. Feeder futures are traded for delivery in January, March, April, May, August, September, October, and November. Because of light trading volume, the January futures prices were not used in the basis calculations. Basis equals futures minus cash. b To allow comparisons across years, the observations were grouped into four periods based on the date of the Wednesday futures. The periods were days 1-7, 8-14, 15-21, and 22-31 of a month. If two days fell in the 22-31 period, the average was used as the observation for that weekly period. The nearby futures was changed during the third weekly period of each delivery month. c Kentucky feeder cattle report not available for week of April 21-25, 1980. d No Kentucky feeder cattle prices were reported for this weekly period in 1979, 1980, and 1981. Thus, no average was calculated. I-' I-'
Sources: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsl~!_te~, July 1978-June 1982 Wall Street Journal, January 1982-June 1982... N
APPENDIX TABLE 3: Nearby Futures - Cash Basis for Feda and Feeder Cattleb, Washington Court House, Ohio and Kentucky Respectively; January and February, 1979-1982 January FED CATTLE February Year First c Second c Third c Fourth c First Second Third c c c Fourth c 1979 1980 1981 1982.50 d.10-5.55-2.25-3.50-2.00-3.90-1.30 -.65-4.05-2.40.18-5.20-3.95 -.25-1. 70-2.80-2.35-1.50 -.90 -.25-3.10-3.35 3.95-1.10-1.25-3.70 -.60.50 2.25-1.40 January FEEDER CATTLE February Year First e Second e Third e Fourth e First Second Third e e e Fourth e 1979 1980 1981 1982 2.50 3.30 6.55 -.10 -.75 3.57 5.25 3.65 -. 71 2.60 6.15 2.65-1. 94 03 4.10 3.22-2.65.65 -.10 1.92-3.00-3.70 3.70 5.62 4.00 8.28 6.75 4.50-3.40-3.00 1.87 4.02 asee footnote a, Appendix Table 1. bsee footnote a, Appendix Table 2. csee footnote b, Appendix Table 1. d No market: holiday. e. See footnote b, Appendix Table 2. Sources: Chicago.Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletter, July 1978-June 1982 Wall Street Journal, January 1982-June 1982... w
APPENDIX TABLE 4: Nearby Futures - Cash Basis for Feda and Feeder Cattleb, Washington Court House, Ohio and Kentucky Respectively; March and April, 1979-1982 FED CATTLE Macch April First Second Third Fourth First Second Third Fourth Year c c c c c c c c 1979 1.30 l.8s -.SS -.80-1.00 1.10 -. 70 l.9s 1980-1.10 -.8S -2.10-2.60-2.10-1. 9S -.8S.43 1981.97 1. 7S -.so. 23.so.6S 3.7S 4.20 1982 -.5S.10 -.6S -.OS.7S l.8s -1.85 -.85 Year First d Secondd March Third d Fourthd FEEDER CATTLE First d -- Secondd April Third d Fourthd 1979-3.80 2.7S 2.05 l.so l.4s -3.75-2.40-9.SO 1980-2.85 -.28 --. 50-1. 75-2.S3-2.60-2.15 -S.7Se 1981 -.25 -.15 -.05-2.88. 2S -2.15 5. 77 3.15 1982 4.12 3.0S 1.05 1.13 3.10 2.88 2.87.75 a See footnote a, Appendix Table 1. b See footnote a, Appendix Table 2. c See footnote b, Appendix Table 1. d See footnote b, Appendix Table 2. ekentucky feeder cattle report not available for week of April 21-25, 1980, Thus, only the April 28-May 2, 1980 observation is used for this period. Sources: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletc.er, July 1978-June 1982 W~ll Street Journal, January 1982-June 1982,_.. ~..
APPENDIX TABLE 5: Nearby Futures - Cash Basis for Feda and Feeder Cattleb, Washington Court House, Ohio and Kentucky Respectively; May and June, 1979-1982 May FED CATTLE June First Second Year c c 1979 2.20-1.50 1980 -.75 1. 90 1981 2.10.90 1982-3.25-2.10 Third Fourth First c c c -4.63-1.35 -.60.00 1.25 -.25 -.10 1.00 1.00.20 -.35 -.05 Second Third Fourth c c c.25-1. 60-3.70-2.00 -.30.85 3.40 1. 92-1.00 -.80-11. 38-3.35d May FEEDER CATTLE June First Second Year e e 1979-5.25-6.85 1980-1.85-3.10 1981-3.05-3.55 1982 1. 97 -.05 Third Fourth First e e e -8.55-5.93-9.50 -.90 1. 20-1.15-2.80 2.20 2.62 -.85-1.15-4.53 Second Third Fourth e e e -8.55-13. 00-10.38 2.15 1.50-1.35 4.00.80 1. 55-4.13-1.03 1. 95 asee footnote a, Appendix Table 1. bsee footnote a, Appendix Table 2. csee footnote b, Appendix Table 1. dno report for June 29, 1982 from Washington Court House. for this period. Thus only the June 22, 1982 observation is used esee footnote b, Appendix Table 2. Sources: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletter, July 1978-June 1982 Wall Street Journal, January 1982-June 1982... \JI
APPENDIX TABLE 6: Nearby Futures - Cash Basis for Feda and Feeder Cattleb, Washington Court House, Ohio and Kentucky Respectively; July and August, 1978-1981 July FED CATTLE August First Second Third Fourth First Year c c c c c Second c Third c Fourth c 1978 ---- d -2.30-2.70 -.65-1.50 1979 - l. 20 1.25 2.00 -.50-3.85 1980 1.20 -.90 -.75.50.25 1981-2.50-2.85-3.35-2.10 05-2.10-2.50 -.85.75-2.70-2.30-5.90-1.80-1.31 -.03-6.20-2.50 July FEEDER CATTLE August First Second Year e e Third e Fourth e First e Second e Third e Fourth e 1978 1. 75 1.12 1979-10.40-10. 75 1980.50-3.95 1981.45 l. 25-2.50-1.50-10.90-7.28-5.60.96 2.35 3.10-2.23-12.00.75 3.83-2.95-7.15 1.95 6.15-3.20-2.60-1.45 5.00-1.37-5.53 -.75 3.80 asee footnote a, Appendix Table 1. bsee footnote a, Appendix Table 2. csee footnote b, Appendix Table 1. dno market: holiday. esee footnote b, Appendix Table 2. Source: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletter, July 1978-June 1982 Wall Street Journal, January 1982-June 1982!-' "' ~ i *
... APPENDIX TABLE 7: Nearby Futures - Cash Basis for Feda and Feeder Cattleb, Washington Court House, Ohio and Kentucky Respectively; September and October, 1978-1981 September FED CATTLE October First Second Third Fourth First Second Third Year c c c c c c c 1978 1.30 1.55 1.85 -.65.65.75-1.10 1979.20 1. 70.30-2.30 -.25-4.40-1.55 1980-5.53-4.90-4.95-4.05-4.05-3.60.10 1981-1.13.00.35 -.65-2.20 -.95 1.10 Year First d Secondd September Third d Fourthd FEEDER CATTLE First d Secondd October Third d 1978 -.03.80 2.30 -.80 2.40 -.90. 00 1979-3.95-4.00-6.88-4.45-5.40-8.50-3.25 1980 1. 05.so 3.50 -.88 1.10-1.80 2.15 1981 4.90 4. 77 6.05 3.60 3.42 6.22 6.12 Fourth c -3.30.05-1.40 -.85 Fourthd -.30-1.10 3.95 6.90 a See footnote a, Appendix Table 1. b See footnote a, Appendix Table 2. c See footnote b, Appendix Table 1. d See footnote b, Appendix Table 2. Source: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletter, July 1978-June 1982 Wall Street Journal, January 1982-June 1982,_... -...I
APPENDIX TABLE 8: Nearby Futures - Cash Basis for Feda and Feeder Cattleb, Washington Court House, Ohio and Kentucky Respectiv~ly; November and December, 1978-1981 November FED CATTLE December First Second Third Year c Perior{ c 1978-1. 65d -.75.30 1979 -.60 2.15. 70 1980 -.23d -2.45-1.40 1981.45.25.65 First Second Year g g 1978 -.60 1.00 1979-1.23-3.03 1980 2.55 2.60 1981 7.15 8.75 November Third g 8.02 6.50 9.00 7.70 Fourth First Second Third c c c c 1.20 -.10.05 3.67 -.05-2.13-3.25 3.00-3.65-4.05-1.4.:> -1.05-2.90-1. 60-1.55-3.75 FEEDER CATTLE December Fourth First Second Third g g g g 5.45 2.75 12.20 4.50 3.15 4.25 7.25 8.75 6.87 15.70 6.95 7.35 4.42 7.22 5.17-2.40 Fourth c -.35 e -1. 25f -6.25 --- Fourth g 1.95 r1 ---- -~--h h asee footnote a, Appendix Table 1. bsee footnote a, Appendix Table 2. csee footnote b, Appendix Table 1. don November 7, 1978 and November 4, 1980; the Chicago Mercantile Exchange was closed for election day. Therefore, the Monday closing futures quote was us-=d as the futures price. eno market: holiday. fno report for December 23, 1980 from Washington Court House. is used for this period. Thus, only the December 30, 1980 observation I-" 00 8see footnote b, Appendix Table 2. ~o Kentucky feeder cattle prices were reporterl for this weekly period. "..
.. ~., Sources: Chicago Mercantile Exchange Yearbook, 1978/79-1981 Ohio Federal-State Newsletter, July 1978-June 1982 Wall Street Journal, January 1982-June 1982 I-' '