Basis is the difference in the price of Canadian cattle and American cattle, expressed in Canadian dollars. There is a basis for both fed and feeder cattle. The western cash-to-cash basis on fed cattle usually compares Nebraska and Calgary. It takes into account the value of Canadian currency on the “spot,” which means at that moment. Basis is to reflect the cost of doing business (delivery and grading) but demand may narrow the basis while an abundance of supply lowers Canadian cash bids and widens the basis.
In the example below, the price of fed cattle in the U.S. is $104 cwt. with a Canadian-U. S. exchange rate of $1.02. In Calgary, cattle were bid at $95 cwt. on the same day. The western cash to cash basis then is -$6.96 cwt.
U.S. fed cattle price US$104 cwt.
Western Canadian fed cattle price C$95 cwt.
Canadian dollar $1.02
Basis calculation: US$104/ C$1.02 = $101.96 cwt.
$101.96 -$95 cwt. = -$6.96 cwt.
Canadian cattle are trading $6.96 cwt. under the price of U.S. cattle. That would be the cash-to-cash basis.
The cash-to-futures basis reflects the difference in price between the cash market of the day for fed cattle and the futures price of a desired month. In the example below the futures price is US$116 cwt. and the exchange that the person is using is the spot dollar, or the dollar at the time of exchange at $1.02. Notice that the cash-to-futures basis is much wider, indicating that the cattle will either go up in price at that time or that it would be an opportunity to hedge or sign a delivery contract if the owner of the cattle is not confident that future price will hold.
U.S. futures price for December US$116 cwt.
Western Canadian fed cattle price $95 cwt.
Canadian Dollar $1.02
Basis Calculation: US$116 cwt./ $1.02 = US$113.72
$113.72 -$95.00 cwt. = -$18.75 cwt.
In this example, Canadian cattle at that moment are trading $18.75 cwt. below the futures price in December. This is the cash-to-futures basis.
Feeder cattle basis
The feeder cattle basis is the difference in price between the same feeder steer in weight from Western Canada compared to the USA. It will always take into account actually delivery costs. U.S. feeder cattle futures are based on 750 lbs.
American feeder cattle price based on 750 lbs. US$125.
Alberta feeder cattle price based on 750 lbs. $116.00 cwt.
Canadian Dollar $11.02
US$125.00 cwt. / $1.02 = C$122.54 cwt.
$122.54 -$116.00 cwt. = –
Western Canadian feeder steers based on 750 lbs. are trading $6.54 cwt. below the U.S. price. This is the feeder cattle basis.
How to use basis
Use the cash-to-cash basis on fed cattle to determine when to sell. The more narrow the basis, the greater of a trigger to sell fed cattle. For example, if the cash to cash basis is -$12 cwt. that is not an incentive to sell but a basis of -$2.50 cwt. most certainly is. Anytime the basis is positive and Canadian cattle are trading for more than U.S. cattle, that is also a signal to sell fed cattle. Fed cattle in western cattle that are left open on the cash market should use the fed cattle cash to cash basis as a determining factor of when to sell.
Use the cash-to-futures basis to determine when to manage risk. The wider the basis in the future months, the more attractive the price for future delivery. The wide basis in the example above of -$18.75 cwt. indicates that there is an opportunity to capture that price, less delivery, on a contract basis. Or to use that as a guide for paper trade. The same process is used for feeder cattle.
Packers will also offer basis contracts. This is to lock in a basis below the U.S. cash price at the time of delivery. There are several things to consider here. The expected cash price at the time of delivery both in Canada and the United States and the value of the Canadian dollar. The basis should be as narrow as possible. For example, a packer offering an eight under basis (-$8 cwt.) for February does not want cattle all that badly. If he thought he was going to be short, the basis would narrow until it was attractive enough for feedlots to consider selling the cattle under those terms.
In all basis deliberations the value of the currency will impact the final outcome. If the Canadian dollar is at $1.05 then the fed cattle cash-to-cash basis in the first example, the basis would be -$4.04 cwt. which is a motivator to sell. If the value of the Canadian dollar in the first example is $.95 then the cash to cash basis widens to -$14.47 cwt. which is a clear indication on a supply strapped market to hold the cattle.
BrendaSchoeppisamarketanalystandtheownerandauthorofBeeflink,anationalbeefcattlemarketnewsletter.Aprofessionalspeakerandindustrymarketandresearchconsultant,sheranchesnearRimbey,Alberta. [email protected]