Understanding Basis: The Biggest Risk in the Cattle Market Today

The dynamics of today’s cattle market is unique and challenging. Key to this challenge is a wide basis spread between cash and futures markets.

“What we have is a big division in our basis,” explains Chris Swift, a commodities broker and founder of Swift Trading Co. “The basis spread tells us where we can buy cattle the cheapest, where we can sell cattle at the most expensive. And right now, it’s a very wide positive basis, suggesting that the cash market is trading considerably higher than the futures.”

Swift joined Chip Flory on “AgriTalk” July 3 to discuss the current state of the cattle market.

During the conversation Swift explains the spread is because the cash producers, the ones who actually are cattle producers, have to be in the cattle business. If they are going to be in the business, they have to buy and market cattle, but a futures trader does not have to do either.

“There’s a division between the producer, having to produce at these price levels, whether he wants to or not, and a futures trader going: ‘You know what, I think he may continue to do that, but I don’t have to support it at the same price level.’ And the belief is that were futures to run to the price of the cash market, then every producer would lay off the risk to the futures market.”

Thus, today it is difficult for producers to lay risk off in the futures.