Negotiated cash fed cattle trade remained undeveloped through Wednesday afternoon.
Choice 2-4 steers (172 head) weighing an average of 1,380 lbs. brought an average of $102.84/cwt. at the fat auction in Tama, IA. At Sioux Falls Regional, in South Dakota, though, 365 head of Choice 2-4 steers weighing an average 1,455 lbs. brought an average of $99.68.
There were 636 head offered in the weekly Fed Cattle Exchange Auction. No sales, but two lots—a pen each of steers and heifers—were passed out at $99.
Cattle futures continued to rally, extending gains from the previous session and lifting hopes that markets carved out a bottom on Monday.
Live Cattle futures closed an average of $1.80 higher ($1.55 to $2.40 higher). That’s an average of $3.67 higher in the last two sessions.
Feeder Cattle futures closed an average of $2.46 higher, making for an average increase of $3.78 over the last two days.
Wholesale beef values were sharply lower on light demand and moderate to heavy offerings, according to the Agricultural Marketing Service.
Choice boxed beef cutout value was $5.49 lower Wednesday afternoon at $219.89/cwt. Select was $2.58 lower at $198.40.
Grain futures traded lower on apparent profit taking Wednesday.
Corn futures closed mainly fractionally lower to 1¢ lower.
Soybean futures closed 4¢ to 5¢ lower through Sep ’20 and then mostly 1¢ to 2¢ lower.
Major U.S. financial indices closed higher Wednesday, led by tech stocks, especially Apple.
The Dow Jones Industrial Average closed 227 points higher. The S&P 500 closed 21 points higher. The NASDAQ was up 85 points.
“Strong basis can help pull cattle through the supply chain, even at low prices, because producers who hedged their cattle want to take advantage of the additional revenue that larger basis provides,” says Josh Maples, Extension livestock economist at Mississippi State University, in the latest issue of In the Cattle Markets. “That is likely the case in recent weeks even as fed prices have deteriorated.”
For those with passing familiarity, Maples explains fed cattle basis is the difference between cash fed cattle prices and spot month Live Cattle futures. He points to last week to illustrate. The 5-area weekly weighted average cash price at the end of last week for all grades of live steers was $101.73/cwt. October Live Cattle futures (the spot month) averaged $97.76 last week. So, the average basis was a positive $3.97.
Those who hedge cattle swap price risk for basis risk, which generally poses less risk, Maples says.
“Using a simplified example, assume a manager purchased a group of steers in March 2019 with plans to feed them for six months and immediately hedged by selling an October 2019 Live cattle futures contract which was trading at $116 at the time. After that point, prices going down helps them in their futures position but hurts them in their cash position, hence they are hedged against the impact of price changes,” Maples explains. “If this manager sold their steers last week and offset (bought back) their futures contract, they would have made $18.24/cwt. in the futures market ($116.00 – $97.76 = $18.24). Their cash cattle were worth much less than they were in March and they sold them for $101.73. Add the $18.24 made in the futures market to the $101.73 from selling the fed steers and this manager earned $119.97, which is $3.97 more than the futures price locked-in back in March ($119.97 – $116 = $3.97). This improvement over the locked-in price is due to the positive basis last week.”
Bottom line, based on average weekly nearby futures and average weekly fed steer price averages, Maples notes basis has been positive since the middle of April.
“This means that hedgers closing out in these weeks generally took home more than what they originally locked-in,” Maples says. “Conversely, from September 2018 through March 2019, basis was negative for 28 out of 32 weeks; hedgers generally took home less than their lock-in price. This shows that there is still risk in hedging, but the range (distribution) of basis risk is usually not as wide as the range of price risk.”