Suppose the December contract is trading today at US$149.83/cwt. The closest Live Cattle futures contract after October would be the December futures contract. Remember, this pen of steers is expected to weigh 1,415 lb. Live Cattle futures contracts for slaughter-weight animals trade for the months of February, April, June, August, October, and December. Never choose a contract that will expire, or stop trading, before your cattle are ready to sell. If cattle are targeted to finish in July, use August futures. If cattle are targeted to finish in January, use the February Live Cattle futures in the basis calculation. Step 1: Choose the futures delivery month closest to, or just past, when the cattle will be sold. The feedlot buyer wants to know what basis is built into that flat-price or forward price contract. The price applies providing the cattle meet the specifications stated in the contract when they are delivered. for the steers delivered to the plant during the third week of October. A packer buyer is offering a flat price or forward contact of C$140/cwt. The feedlot buyer expects the animals to be finished in mid October. steers being fed for sale to slaughter weight. Since the basis is stronger than the average basis, the cattle seller would accept the offer of packer buyer. A better or stronger basis is one that gives a higher cash price providing that futures don't change in the meantime. The feedlot operator knows a more normal basis (average basis for last 5 years) for steers during June is about -C$ 5.8 or C$ 5.8 under August futures. The basis being offered for this pen of cattle is -C$ 4.9Cdn or C$ 4.9 under the August Live Cattle futures price. Since today is June 4, the futures month that is closest to June 4 is August. The cattle owner calculates the basis this way:įirst, the feedlot operator must figure out which is the nearby futures month for CME Live Cattle (slaughter cattle) futures. The feedlot operator needs to know what basis the buyer is offering in his bid. The packer buyer has bid C$ 148/cwt for the animals. Today is June 4 and a feedlot has a pen of finished steers. This basis will show the difference between today's cash price and what the futures market believes, today, that cattle will trade for at a point in the future. Once this conversion is done, a simple subtraction from the local cash market price will give a basis for that class of animal. Since futures contracts are traded in US dollars and based on US grades of cattle, futures prices must be converted to a Canadian dollar equivalent. The changing basis level can provide opportunities for pricing cattle. The basis will usually change over time as the nearby futures month gets closer to the present time. The difference between the two markets is the basis. As time passes, the cash price and futures price typically converge or come together. For Canadian producers, the spot basis means the difference between the Canadian cash market and a US futures price, since the only futures market in North America that trades cattle futures contracts is the Chicago Mercantile Exchange (CME) located in Chicago, Illinois.Ī futures contract price reflects what traders think today that cattle will be worth at a specific future time, and the cash market reflects the actual selling price of a physical commodity. Often a basis quote refers to the "spot" basis, which is the difference between the current cash price for slaughter or feeder cattle and the "nearby" futures price. Basis is the difference between a cash price and a futures price.
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |