• TABLE OF CONTENTS
HIDE
 Front Cover
 Foreword
 Table of Contents
 List of tables and figures
 Main
 Tables 1-9
 Figures 1-18
 Appendices
 Back Cover














Group Title: Bulletin Florida Cooperative Extension Service
Title: Analysis and use of the Florida feeder cattle futures basis
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 Material Information
Title: Analysis and use of the Florida feeder cattle futures basis
Series Title: Bulletin Florida Cooperative Extension Service
Physical Description: iv, 51 p. : ill. ; 28 cm.
Language: English
Creator: Simpson, James R
Ward, Ronald W
Publisher: Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville
Publication Date: 1985
 Subjects
Subject: Cattle trade -- Florida   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Bibliography: p. 17.
Statement of Responsibility: James R. Simpson, Ronald W. Ward.
General Note: Cover title.
General Note: "February 1985."
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Bibliographic ID: UF00008519
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: ltqf - AAA6781
ltuf - AEG7080
oclc - 14635800
alephbibnum - 000870015

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Table of Contents
    Front Cover
        Front Cover 1
        Front Cover 2
    Foreword
        Page i
    Table of Contents
        Page ii
    List of tables and figures
        Page iii
        Page iv
    Main
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
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        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
    Tables 1-9
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
    Figures 1-18
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
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        Page 37
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
    Appendices
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
    Back Cover
        Page 52
Full Text


February 1985


HUME LIBRARY

OCT 13 1986
I.F.A.S. Univ. of Florida


Bulletin 215


Analysis and Use of the Florida

Feeder Cattle Futures Basis

James R. Simpson
Ronald W Ward


I I


Florida Cooperative Extension Service I Institute of Food and Agricultural Sciences / University of Florida / John T. Woeste. Dean


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Forward


This bulletin contains an examination of the Florida feeder cat-
tle futures basis for the period 1972-1982. Basis tables and graphs
are presented for four weight groups of Florida Medium 1 and Medium 2
grade feeder steers; 200-300 pounds, 300-400 pounds, 400-500 pounds
and 600-700 pounds. In addition, the basis for Medium 2 grade 400-500
pound heifers is provided for a total of nine classes of cattle.

Examination of the data indicates that the widest basis varia-
tions have taken place in the lightest weight animals. A very defi-
nite seasonal variation exists with the widest basis in May and the
least in December. Basis patterns are emphasized and cattle producers
are shown how to use basis in their marketing programs. This bulletin
also includes definitions of trading terms and specifications of the
feeder cattle contract.














Table of Contents


Page

Foreward.... ... .... .. ........ .................... ..............

List of Tables ........................................ .....iii

List of Figures ............................................iii-iv

Introduction............................ .............. ....... 1

Basis Fluctuations--The Problem...............................2

Feeder Cattle Contract Specifications.........................3

Methodology for Basis Calculations..........s-o ...............4

Basis Tables and Charts............................... ............6

Seasonal Variations .............................................8

Example of Basis Considerations in a Feeder Cattle Hedge.........9

Narrowing and Widening Basis ..................................11

Narrowing Basis.... ......................................... 11
Widening Basis................................... ......... 12

Cyclical Basis Fluctuations .................................. 13

Summary and Conclusions........................................ 15

References.................................................. 17

Appendix I Definitions.....................................45

Appendix II Feeder Cattle Contract Specifications at the
Chicago Mercantile Exchange..............................47

Appendix III Certificate of Delivery..........................49

Appendix IV Approximate Relationship Between Week Number and
Month, and Week within the Month...................51













List of Tables


Table Page

1 Mean basis and standard deviations for 200/300 lb
Medium 1 steers, Okeechobee, Florida, 1972-1982 .........18

2 Mean basis and standard deviations for 300/400 lb
Medium 1 steers, Okeechobee, Florida, 1972-1982 .........19

3 Mean basis and standard deviations for 400/500 lb
Medium 1 steers, Okeechobee, Florida, 1972-1982 .........20

4 Mean basis and standard deviations for 600/700 lb
Medium 1 steers, Florida average, 1972-1982 .............21

5 Mean basis and standard deviations for 200/300 lb
Medium 2 steers, Okeechobee, Florida, 1972-1982 .........22

6 Mean basis and standard deviations for 300/400 lb
Medium 2 steers, Okeechobee, Florida, 1972-1982 .........23

7 Mean basis and standard deviations for 400/500 Ib
Medium 2 steers, Okeechobee, Florida, 1972-1982 .........24

8 Mean basis and standard deviations for 600/700 lb
Medium 2 steers, Florida average, 1972-1982 .............25

9 Mean basis and standard deviations for 400/500 lb
Medium 2 heifers, Okeechobee, Florida, 1972-1982 ........26


List of Figures


Figure Page

1 Average monthly basis for Medium 1 steers, 200-300
pounds, Okeechobee, Florida, 1972-1982...................27

2 Average monthly basis for Medium 1 steers, 300-400
pounds, Okeechobee, Florida, 1972-1982...................28

3 Average monthly basis for Medium 1 steers, 400-500
pounds, Okeechobee, Florida, 1972-1982....................29














List of Figures count.


Figure

4 Average
pounds,

5 Average
pounds,

6 Average
pounds,

7 Average
pounds,

8 Average
pounds,

9 Average
pounds,

10 Average
pounds,

11 Average
pounds,

12 Average
pounds,

13 Average
pounds,

14 Average
pounds,

15 Average
pounds,

16 Average
pounds,

17 Average
pounds,

18 Average
pounds,


Page

monthly basis for Medium 1 steers, 600-700
Florida, 1972-1982...............................30

monthly basis for Medium 2 steers, 200-300
Okeechobee, Florida, 1972-1982....................31

monthly basis for Medium 2 steers, 300-400
Okeechobee, Florida, 1972-1982....................32

monthly basis for Medium 2 steers, 400-500
Okeechobee, Florida, 1972-1982...................33

monthly basis for Medium 2 steers, 600-700
Florida, 1972-1982...............................34

monthly basis for Medium 2 heifers, 400-500
Okeechobee, Florida, 1972-1982...................35

annual basis for Medium 1 steers, 200-300
Okeechobee, Florida, 1972-1982................... 36

annual basis for Medium 1 steers, 300-400
Okeechobee, Florida, 1972-1982....................37

annual basis for Medium 1 steers, 400-500
Okeechobee, Florida, 1972-1982...................38

annual basis for Medium 1 steers, 600-700
Florida, 1972-1982............ ...................39

annual basis for Medium 2 steers, 200-300
Okeechobee, Florida, 1972-1982....................40

annual basis for Medium 2 steers, 300-400
Okeechobee, Florida, 1972-1982...................41

annual basis for Medium 2 steers, 400-500
Okeechobee, Florida, 1972-1982..................42

annual basis for Medium 2 steers, 600-700
Florida, 1972-1982...............................43

annual basis for Medium 2 heifers 400-500
Okeechobee, Florida, 1972-1982....................44














ANALYSIS AND USE OF THE
FLORIDA FEEDER CATTLE FUTURES BASIS


Price movements are a major factor contributing to economic suc-
cess or failure in cattle production. Consequently, producers must
either be in a financial position to withstand considerable economic
losses or protect themselves in some way against adverse price
changes. Price risk management and new production technologies can
greatly reduce an individual's production uncertainties, and thus lead
to potential increased profits and a more stable cash flow. On the
other hand, while most producers have control over some factors that
lead to production uncertainties, most also tend to be price takers
and thus face market price uncertainties.

This bulletin is intended to provide information for hedging cat-
tle, one means which Florida producers have for reducing risk from
price uncertainty and allowing greater control over the selling price.
The reader should have a basic understanding of hedging to make the
most effective use of this report.




Introduction


A number of pricing mechanisms have evolved over time to help
producers cope with price risk; futures trading is one of these alter-
natives. Futures contract specifications, geographical production
differences and industry size are a few of the determinants affecting
applicability of a futures market to specific producers. The trading
concept is reasonably simple and readily implementable, but the use of
this marketing tool requires careful planning and analysis by the po-
tential hedger [1,2]. The intent of this bulletin is not to outline a
detailed planning strategy for hedging, but rather to concentrate on














the basis which must be clearly understood for successful use of a fu-
tures market for forward pricing.

Consider an example where a cattle producer decides to background
steers to 700 pounds. The producer may implement production plans and
five months later sell the cattle to an order buyer in the cash market
(see Appendix 1 for definitions). In this case the risk of a price
fall is borne by the backgrounder. Alternatively, if the same produc-
er were to forward price the steers by selling feeder cattle futures
contracts, the price risk would theoretically be minimal. The cattle
(assuming they fit contract specifications) could be delivered against
the forward commitment at the fixed forward selling price. Alterna-
tively, the forward position could be reversed by buying the contract
back and selling the cattle in the spot market. In this latter case,
price risk is reduced to basis risk. The concept of basis is now dis-
cussed.




Basis Fluctuations-The Problem


The futures market hedging activity is not quite so simple as im-
plied above. Delivery points are sometimes inaccessible to local pro-
ducers and cattle grades frequently do not correspond with contract
specifications. Thus, futures positions are almost always reversed
when the cattle are ready to be sold by buying an offsetting futures
contract and selling the cattle in the cash market. Since the selling
price has already been established with the forward commitment, real-
ized returns from the production activity depend on the production
costs, and the closing basis when the contract is terminated. The
closing basis is the difference between the futures and cash price at
the time the contract is terminated by reversing the initial futures
position.














The realized price (the price received after adjusting for the
futures transactions) will always equal the initial forward price less
the closing basis. The price risk now lies solely with the risk of
basis changes since the forward price is already known [6]. The basis
risk depends on the level of correlation between the closing futures
price and the spot price. The greater this positive correlation, the
lower will be the basis risk. Cash and futures prices for cattle are
generally highly correlated. However, the local cash price for light-
weight cattle in Florida and feeder cattle futures prices are not al-
ways closely related, and the basis fluctuation can be quite large.
The more removed a local market is from the mainstream of buying and
selling transactions, the greater the probability of increases in ba-
sis fluctuations. Also, regional markets such as Florida's feeder
cattle industry often produce cattle that do not correspond to con-
tract specifications. Hence the two prices are reflecting different
characteristics--and thus may be less correlated than prices reported
in other regions.

Contract specifications are discussed in the next section. The
results from evaluating feeder cattle basis changes over an 11 year
period are given. A number of examples are presented that demonstrate
how the reported basis patterns can be applied to practical hedging
plans.


Feeder Cattle Contract Specifications


There are two futures market exchanges which handle cattle con-
tracts. The Mid America Exchange trades in small contracts while the
Chicago Merchantile Exchange (CME) trades in large contracts. The CME
cattle contracts include one for slaughter weight steers (Live Cattle
Contract) and one for feeder cattle. The Feeder Cattle Contract is
based on a trading unit of 44,000 pounds of Medium Frame Number 1














feeder steers. The par delivery unit, also for 44,000 pounds of feed-
er steers, specifies an average weight between 575 and 700 pounds.
Feeders can be delivered weighing up to 800 pounds, but with a prede-
termined discount on the delivery price. A complete set of specifica-
tions on both the trading and delivery unit is given in Appendix 2.
The nearest delivery point for Florida producers is Montgomery, Ala-
bama, a location which carries a $6.00 per cwt. discount from the Chi-
cago futures price. Information about "certificates of delivery," a
system initiated with the December, 1983 contract, is given in Appen-
dix 3.




Methodology for Basis Calculations


Futures price data were obtained from CME's Yearbook for the pe-
riod January, 1972-December, 1982 [3]. The daily closing quote is
from Monday with the date shown in all accompanying tables being the
following Friday i.e., the end of that week. Florida cash prices are
from the Okeechobee Livestock Auction as published in the Florida
Livestock Market Report, a weekly report from the Florida Department
of Agriculture and Consumer Services in conjunction with the Federal-
State Market News Service [4]. The data shown in subsequent tables
are recorded as a Friday date to conform with the Report's release
time. Naturally, the cash prices are subject to the limitations of
Market News Service data. For example, the prices are simple averages
of the daily prices rather than being weighted by volumes of sales.

The one exception to using Okeechobee data is 600-700 pound
steers where state averages were used due to frequent omissions in re-
ports for Okeechobee and other Florida markets. A check was made on
using state price averages by correlating them with averaged prices
for 600-700 pound Medium 1 steers at the Marianna and Graceville mar-














kets in north Florida (these markets are so close together they can be
considered one market for these statistical purposes). The correla-
tion was 0.99 in virtually every month with 0.97 being the lowest, and
that was in January when there were considerable missing values.
Overall the analysis indicates the two sets of prices move together in
all months.

A regression analysis on the 600-700 pound data indicates the two
market price average was numerically $0.48 higher than the state aver-
age, although statistically the very large standard error indicates
there is no difference between the two price series. In a practical
sense producers hedging 600-700 pound cattle in the Marianna-
Graceville area should reduce their basis by $0.48 from the data pro-
vided in this analysis.

Cash prices (C) are subtracted from futures prices (F) to calcu-
late the basis (B), i.e. B = F-C. A positive basis means that the fu-
tures price is above the particular cash price. Also, the basis re-
ported is tied to the nearby contract, i.e., the closest contract to
maturity that is being evaluated.

Judgment is required in determining the time to change from one
contract to the next one when calculating the nearby basis. The ap-
proach used in this report is switching to a new contract price when
the trading month becomes the same as the contract month. For exam-
ple, the March feeder cattle contract is traded until the 20th of
March at the CME, but our basis is shifted to the April contract as of
March 1st. The eight feeder cattle contract months are January,
March, April, May, August, September, October and November.

Location is another factor. Since futures markets reflect Mid-
west and Southwest markets, producers should make allowances for their
grades as well as distance from the Florida cash price reference
point, which is Okeechobee in the southern part of the state. Thus,














north Florida producers, depending on their location, should subtract
$1-2 from their localized futures price on the lighter weight classes
(which are shipped north from Okeechobee). However, the 600-700 pound
weight class basis appears to hold through most of the state since
these heavier feeders are shipped both north and south. As indicated
earlier, producers in the Marianna-Graceville area should subtract
$0.48 from their localized basis.




Basis Tables and Charts


Basis is calculated for the following classes and weights of cat-
tle:


200-300 pound Medium 1 feeder steers
300-400 pound Medium 1 feeder steers
400-500 pound Medium 1 feeder steers
600-700 pound Medium 1 feeder steers
200-300 pound Medium 2 feeder steers
300-400 pound Medium 2 feeder steers
400-500 pound Medium 2 feeder steers
600-700 pound Medium 2 feeder steers
400-500 pound Medium 2 feeder heifers


Week numbers 1, 27 and 52 have many values missing because mar-
kets often close for holidays. Consequently, basis figures are only
given for 49 weeks. The approximate relationship of these numbers to
weeks within each month is provided in Appendix 4.

Basis averages for each of the nine classes of cattle, as derived
from the 11 years of data for the period 1972-1982, are given in Ta-
bles 1-9 and graphed in Figures 1-9. The center line in each figure














represents the average basis, which is also the one presented in the
tables. As an example, Table 4 and Figure 4 illustrate that the basis
for '600-700 pound Medium 1 steers for week 15 (or the second week of
April) is $6.5023. This positive number means that on the average
Florida cash prices for feeders near the contract weight are $6.50 per
cwt. under the April contract quote for that week. Thus, if the fu-
tures quote (F) were $66.00 per cwt., then the Florida "realized
price" would be estimated at $59.50 per cwt. This is calculated as
follows:


"Realized Price" = Futures Closing Basis
= $66.00 $6.50
"Realized Price" = $59.50


The basis is an average which carries the implication that in
some years it will be higher or lower than that calculated above. The
indicator for basis risk (i.e., the risk from changes in the basis) is
estimated by the standard deviations presented in the second columns
of Tables 1-9 and are represented by the upper and lower lines in Fig-
ures 1-9. The standard deviation corresponding to the second week of
April for 600-700 pound Medium 1 steers in Table 4 is $2.5535. Sta-
tistically, approximately 66 percent of the time the actual basis will
lie within $2.55 above and below the average basis. In other words,
66 percent of the time the basis would fall between $3.95 ($6.50 -
$2.55) and $9.05 ($6.50 + $2.55).

The impact of this variation in the basis on a producer's deci-
sion to hedge can be placed in perspective by comparing the basis risk
to the potential risk faced from market price fluctuations during any
one given week. For the example just presented, the Florida market
for 600-700 pound cattle sometimes does fluctuate $1-3 in any one week
which means that the basis risk, while a factor in planning and strat-














egy development, probably should not be considered a deterrent to cat-
tlemen interested in using the futures market for sale of yearling
steers in April.

Examination of standard deviations in the tables for other class-
es of cattle indicates that basis risk increases considerably as cat-
tle weights decline. For example, the deviation for 300-400 pound
Medium 1 steers is about $10-15 per cwt. from February through June,
although it falls to about $7-9 per cwt. during the rest of the year.
This relatively large fluctuation points to the need for very careful
planning when hedging this class of cattle.




Seasonal Variations


The basis for calves becomes greater during the spring months
(Figures 1-9) because, nationally, February-June is the time when
there is the least supply of calves. Thus, there is more fluctuation
in supply and, consequently, a greater standard deviation in the basis
than during periods when supplies are greater. Notice in these annual
charts that as one calculates the basis for the lighter weight animals
(200-500 pound) the basis becomes increasingly negative. In the
spring months the basis becomes even a larger negative number. As
will be shown later this works to the detriment of hedgers.

Basis for 600-700 pound feeders embodies the opposite seasonal
effect from 200-500 pound calves since the late fall months of October
and November are the ones with the least supply of the lighter weight
cattle, especially in the Southeast. The basis differs between the
weights because throughout this area most calving takes place from
December-March and weaned calves are typically backgrounded during the
winter months for sale in the spring. The main points are: (a) poten-
tial hedgers need to be very cognizant of seasonal basis fluctuations














when developing hedging strategies and choosing a basis, (b) basis
risk is sufficiently high during some periods of the year that consid-
erable expertise is required to effectively use the futures market
and, (c) the basis risk is sufficiently small during other periods of
the year that hedging can more effectively be used for heavier weight
cattle.




Example of Basis Considerations in a Feeder Cattle Hedge


The basis reflects changes in the difference between futures and
local cash prices and, as such, is extremely important over the pro-
duction period as a determining factor influencing hedging returns.
If, for example, the basis narrows from the time when the hedge was
placed (selling a contract or "short hedging") until the contract is
closed, the cattle producer will benefit (in the futures market) from
such favorable basis narrowing. On the other hand, a widening of the
basis works to the disadvantage of short hedgers. Consequently, un-
derstanding basis variations is central to any successful hedging pro-
gram.

As an illustration assume that as a producer you have 160 head of
feeder steers on rye-ryegrass pasture with sale anticipated for the
second week of April. It is December and you are concerned that year-
ling feeder prices may drop and are considering a risk averting strat-

egy. Following are the steps for hedging which involve use of basis
information.

Begin by assuming that the steers will weigh 700 pounds when fin-
ished the first week of April. The April futures quote is $65.00 per
cwt. so the comparison with the cash or localized price is:














Base
Item situation

--$/cwt--
April feeder futures quote in December 65.00
April basis, week 15 (Table 4) 6.50
Localized price 58.50




This first step included calculation of the localized price by
using the average basis as shown in Table 4 for Florida, the second
week of April. Again, if a localized market were found to differ,
then an adjustment would be made at this time. The potential return
to management (profit) is now calculated by subtracting production
costs:


Base
Item situation

--$/cwt--
Localized price 58.50
Production costs 50.00
Profit (return to management) potential 8.50




The calculations show that if the estimated production costs do

indeed turn out to be $50.00, then a return to management (profit) of
$8.50 per cwt (minus brokerage and other marketing costs) is possible
by forward contracting on the futures market. If this appears to be

satisfactory and you do want to hedge against downside risk, then two
feeder cattle contracts would be sold (the expectation is that 112,000
pounds would be sold and each contract is 44,000 pounds). If you only
want to hedge 50 percent of your production, sell one futures con-














tract. This decision depends on your own risk carrying ability. How-
ever, one problem that will develop is a widening or narrowing of the
basis.




Narrowing and Widening Basis


Examination of Table 4, as described in the earlier discussion,
shows that the basis for 600-700 pound Medium 1 steers during week 15
is likely to fluctuate between $3.95 and $9.05. The analysis below
begins with a situation in which the basis narrows from the average of

$6.50.


Narrowing Basis

Assume that when the cattle are actually sold the second week of
April the basis turns out to be $3.25 rather than the $6.50 which was
used in the original calculations. The first step in estimating the

impact on profit is to check the futures potential:



Narrower
Item basis


April feeder futures in December
Narrower basis
Localized price


--$/cwt--
65.00
3.25
61.75


The next step is to check the profit potential:














Narrower
Item basis

--$/cwt--
Localized price 61.75
Production costs 50.00
Profit (return to management) potential 11.75




The net result of this narrower basis is that a profit of $11.75
rather than $8.50 would potentially be realized. The calculations
were presented for the decision in December to demonstrate the compu-
tations that would be involved if it was believed the basis might nar-
row. The same approach would be taken if the profit potential were to
be calculated for sale at another period in which the average basis
was narrower than the one used in the base situation.

As an example of reanalysis at a different time period let's look
at week 12, or the middle of March. Data in Table 4 reveal the aver-
age basis is $5.78 for this week, indicating that the profit potential
based on sale price, as determined by the average basis, is $0.72
higher ($6.50-$5.78) than three weeks later. Naturally, the sale de-
cision would involve consideration of additional gain which could be
made, basis risk and pasture availability. The purpose of this sec-
tion simply has been to show the impact from a narrower basis and how
to use the basis data reported in the tables.


Widening Basis

A widening basis in relation to the initial calculations means
that profit potential for the short hedger will be reduced, just as it
is expanded from a narrowing basis. Rather than go through the de-
tailed two step procedure just described, the impact of a widening ba-
sis can be calculated using a short-cut method.













Let's assume that the closing basis is $8.75 instead of $6.50
used in the initial example, or an additional $2.25. This difference
is then subtracted from the original profit calculation of $8.50 so
that the new profit potential (or actual if it took place when an off-
setting contract was purchased) would only be $6.25 ($8.50-$2.25).
Briefly stated, a narrowing basis increases profit while a widening
basis reduces it for the short hedger such as a feeder cattle produc-
er. In practice, it means the basis should be monitored near the time
period cattle will be marketed and the contract offset (sell cash, buy
back futures) when the most favorable basis occurs.

In each of the examples presented the hedger is assumed to re-
verse the futures position and hence must be concerned with the clos-
ing basis. If the closing basis begins to widen considerably, then
the producer may find it more profitable to close out the position
earlier than originally intended, even though that strategy would mean
going back to an unhedged position and accepting the remaining price
risk. Delivery of cattle is another option, but it is not very prac-
tical for most Florida feeder cattle producers, and is impossible when
lighter weight cattle are hedged. This is precisely why a good under-
standing of basis patterns is essential to a good trading plan.


Cyclical Basis Fluctuations


The basis for both calves and yearling feeders fluctuates when
cattle prices make substantial upward or downward moves. In the case
of calves, the basis widens when the general level of prices is low or
declines, and narrows when prices increase. This is illustrated below
where the left figure shows the general decline in the basis for 400-
500 pound steers to negative values as cattle prices become higher.
The scattering of the basis values are shown to illustrate the overall
variability that can be expected.














Yearling steers have a much different basis movement pattern than
do calves, as illustrated in the right graph presented below. In this

case there is a consistent pattern of positive basis found for 600-700

pound feeders, i.e. there is no change regardless of price level. The
point made in the two graphs is that substantial changes occur in ba-
sis patterns for lightweight cattle as prices move higher or lower,
whereas no pattern of basis change occurs for 600-700 pound feeders.


400 500 Pound
Feeders


600 700 Pound
Feeders


Closing Basis


Closing Basis





Cattle
Price


Medium
I I
I I
I I
I I
II


High


As an example, the basis for 400-500 pound Medium l's averaged
about negative $10/cwt in both 1973 and 1979 when cattle prices were
relatively high (Figure 12). During 1974 1977 when cattle prices
were relatively low, the basis moved to a positive $5/cwt. or a dif-
ference of $15.00. (An explanation of changes in price differentials


Cattle
Price














between classes of cattle at different general levels of cattle prices
is found in [5]).

When prices began advancing during the late 1970s the basis for
400-500 pound Medium l's turned negative again, reaching -$10 in 1979.
Since that time it has remained near $0 which means that on the aver-
age 400-500 pound Medium l's in Florida were the same price as the fu-
tures quotes for the feeder cattle contract. On the other hand, the
evaluation of basis for the class of cattle specified in the futures
market contract, Medium l's 600-700 pounds, shows the basis moves rel-
atively little from year to year (Figures 12 and 13).

There are cyclical variations in the basis when cattle prices
fall or rise rapidly because expectations about prices of the finished
product are either excessively bearish, or bullish, and because of the
lag time while cattle are on pasture or in feedlots [6]. The impact
on producers is exemplified by further review of Figure 13 and recall-
ing that B=F-C. The general rule is the basis narrows during price
rises and widens during falling markets. Such movements work adver-
sely to producers since the desirable strategy would be to have hedged
during falling market price periods.




Summary and Conclusions


Basis tables and graphs have been presented for four weight
groups of Florida Medium 1 and Medium 2 grade feeder cattle; 200-300
pounds, 300-400 pounds, 400-500 pounds and 600-700 pounds. In addi-
tion, the basis for 400-500 pound Medium 2 heifers is provided.

A review of basis risk indicates that producers in a hedged posi-
tion faced with a widening basis will suffer a loss in potential pro-
fit's from the basis change. Unfortunately, this situation usually














prevails when prices are falling, exactly when producers, whether they
be cow-calf operators or backgrounders, most need to use the futures
market. In contrast, when prices are rising or at relatively high
levels, the basis is fairly narrow which is favorable to producers,
but hedging may not be advantageous unless it is suspected that prices
will peak and fall.

Successful hedging depends on a well-planned trading program with
particular consideration given to the basis patterns. The factors re-
lated to basis are presented in this bulletin. The effect of a nar-
rowing or widening basis, seasonal fluctuations and cyclical fluctua-
tions are included. An overall conclusion is that potential hedgers
must be especially careful with their hedging programs when prices are
expected to rise due to lost profit potential from favorable cash
price movements. In contrast, basis risk is greatest when prices are
low or falling, thus reducing to some extent the profit expectations
from hedging. Careful review of the material in this bulletin will
help in determining the more effective trading strategies.

Examination of the data for the nine classes of cattle indicates
that the widest basis variations take place in the lightest weight an-
imals and, consequently, considerable care must be taken in attempting
to hedge these animals. In contrast, the relatively small amount of
basis fluctuation and relatively low standard deviations for 600-700
pound feeder cattle indicates considerable potential for effective
hedging by backgrounders intending to sell feeders corresponding
closely to the futures contract specification.














References


[1] Chicago Mercantile Exchange. How to Make Livestock Futures Work
For You. July, 1977.

[2] Chicago Mercantile Exchange. Bibliography and Information Source
List. April, 1978.

[3j Chicago Mercantile Exchange. Yearbook. Various years.

[4] Florida Department of Agriculture and Consumer Services. Florida
Livestock Market Report. Weekly.

[5] Simpson, James R. and Rom Alderman. "Project Your Cattle Prices
Using Differentials." The Florida Cattleman. Vol. 47. August,
1983, pp. 40,41.

[61 Ward, Ronald and Greg Schimkat. "Risk Ratios and Hedging:
Florida Feeder Cattle." Southern J. Agr. Econ. 11(1979): 71-77.










Table 1. Mean basis and standard deviations for 200/300 Ib Medium 1
steers, Okeechobee, Florida, 1972-1982

Approximate
Week month and week Mean basis Standard deviation

1 January 1
2 2 -13.5071 16.3571
3 3 -9.7289 16.9296
4 4 -8.5563 11.4835
5 February 1 -15.9167 19.5372
6 2 -10.9333 9.7657
7 3 -13.5209 17.5563
8 4 -18.1050 22.6350
9 March 1 -17.0955 20.9611
10 2 -15.9644 14.4051
11 3 -16.2079 12.7637
12 4 -21.0150 17.1486
13 5 -15.2044 13.9902
14 April 1 -14.3733 10.4209
15 2 -11.7070 11.9096
16 3 -18.2014 22.8263
17 4 -18.7891 23.4016
18 May 1 -17.4345 23.0664
19 2 -16.0441 21.3316
20 3 -18.1909 20.5149
21 4 -16.5782 16.8609
22 June 1 -19.0527 21.5607
23 2 -15.0010 18.0099
24 3 -16.4509 19.0853
25 4 -16.3710 20.9056
26 5 -13.0550 19.8808
27 July 1
28 2 -18.0633 26.1107
29 3 -21.7333 21.9524
30 4 -17.2350 10.2822
31 August 1 -14.5725 16.3229
32 2 -16.2556 14.0947
33 3 -17.6506 12.8367
34 4 -15.4280 18.4107
35 September 1 -13.6430 16.1351
36 2 -11.8513 11.2661
37 3 -15.1483 19.8582
38 4 -13.5114 16.4557
39 5 -11.3227 15.7062
40 October 1 -11.1530 17.9022
41 2 -14.7056 12.0293
42 3 -12.0075 11.4436
43 4 -11.4975 11.6149
44 November 1 -11.8663 11.6561
45 2 -10.5563 13.6110
46 3 -6.9722 13.1080
47 4 -3.7789 10.9639
48 December 1 -13.3929 14.0763
49 2 -7.0313 15.6251
50 3 -6.9880 14.6743
51 4 -7.6500 11.8491
52 5 .











Table 2. Mean basis and standard deviations for
steers, Okeechobee, Florida, 1972-1982


300/400 lb Medium 1


Approximate
Week month and week Mean basis Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May 1
2
3
4
June 1
2
3
4
5
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
4
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5


-1.9750
-3.5560
-0.9475
-4.5550
-1.2200
-4.6800
-6.6050
-6.9136
-9.6955
-6.8757
-8.0909
-6.8065
-5.5160
-6.4070
-8.8377
-9.9709
-8.2300
-8.4645
-10.2364
-8.8055
-8.1664
-6.0400
-6.1555
-6.6460
-4.4300

-6.0288
-6.1714
-3.8292
-3.2450
-4.2050
-3.7777
-3.5073
-1.2095
-2.0067
-6.1900
-3.4091
-1.8568
-2.0280
-2.2341
-1.6045
-0.5405
0.9795
0.5200
1.5650
3.5515
1.2244
-1.1830
-1.0880
0.2125
*


8.8769
9.3458
5.5781
10.6556
7.6320
11.1088
13.0228
12.5891
12.7322
8.5962
10.4073
11.1196
8.5788
8.7676
13.6885
14.7800
15.5087
13.9766
18.2767
13.0897
13.6298
10.7811
10.1440
12.9472
12.4763

13.2635
13.2073
7.3542
9.7003
8.7108
7.8612
9.7276
9.9485
6.6458
14.0856
8.8190
7.6608
9.7539
7.2204
6.9740
7.6193
6.8413
7.3176
7.0374
6.9623
9.0516
7.2667
7.8874
7.3859
*










Table 3. Mean basis and standard deviations for
steers, Okeechobee, Florida, 1972-1982


400/500 lb Medium 1


Approximate
Week month and week Mean basis Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May 1
2
3
4
June 1
2
3
4
5
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5


2.2906
0.9815
1.6150
0.1325
2.3050
0.3427
-0.5425
-0.4591
-1.5305
0.9467
-0.7675
-1.7940
-0.1285
0.2956
-1.4741
-2.3459
-1.4800
-2.1691
-2.4000
-1.1123
-2.0186
0.9373
0.1173
0.3040
0.3575

-0.9663
-0.7607
1.5875
1.6300
1.8700
1.9950
1.5155
4.0405
2.8490
0.4906
2.0455
2.7205
3.7220
3.1636
3.3955
3.9345
4.1295
5.6450
5.9025
6.1890
4.3494
3.3170
3.7870
4.2750
*


4.9905
6.3492
3.9243
5.7462
4.6633
8.3716
8.7583
7.5446
6.0099
4.4630
7.3490
6.9760
5.1972
5.7113
6.6652
8.6784
9.5197
8.6784
6.8031
7.6557
7.8709
5.9649
5.4864
6.9178
7.7030

7.7577
7.1746
4.8159
5.7919
5.1137
4.2984
6.2558
5.8962
3.2181
6.2871
4.6800
4.4085
4.8909
2.9173
4.0773
4.7343
4.1257
3.5381
3.1517
4.8301
4.9567
3.8250
4.9464
5.5829











Table 4. Mean basis and standard deviations for
steers, Florida average, 1972-1982


600/700 lb Medium 1


a=5~ n flflflfP~1 Lr~-3lSr~~i~ n n nSainfla lflt ~ ~ S -tfl ~ L


Approximate
Week month and week


Mean basis


Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
5
May 1
2
3
4
June 1
2
3
4
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5


6.6167
7.2065
7.4150
6.7450
6.7950
5.8314
5.7075
6.4727
5.6155
6.6632
5.7750
6.2760
6.2145
6.5023
6.7077
6.3320
6.2470
6.9615
5.7977
6.8767
5.2772
5.2865
5.5661
7.0800
5.2167

4.8064
4.9667
6.0083
6.3119
6.3278
7.0973
6.9700
6.7120
6.9340
6.9869
6.2727
8.3100
7.4028
7.5614
9.2600
8.1995
9.3270
10.4500
11.0564
11.0915
9.5270
9.7950
8.5991
9.4375


2.5581
3.0987
2.9760
2.5282
/ 2.3070
3.1634
2.8020
2.6474
2.0691
2.3023
2.0074
1.4535
2.4930
2.5535
2.3819
1.9503
2.5294
3.5073
3.3006
2.7071
4.2893
3.1760
3.9489
3.9313
2.8241

1.9797
1.8121
0.7053
2.6019
2.6566
2.7054
2.7072
3.1157
2.8951
4.0192
3.4246
3.1097
2.9412
3.7726
3.2682
4.2734
4.5774
4.2091
5.1363
4.1305
3.5840
3.5434
3.2831
4.5083
*










Table 5. Mean basis and standard deviations for
steers, Okeechobee, Florida, 1972-1982


200/300 lb Medium 2


Approximate
Week month and week Mean basis Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May 1
2
3
4
June 1
2
3
4
5
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5


-1.7563
-3.7810
-1.8600
-7.0800
-1.5700
-7.1573
-10.2550
-11.8455
-11.3164
-6.8033
-10.0909
-7.7940
-7.4910
-6.5320
-12.2809
-12.8345
-11.2527
-10.4645
-11.3727
-10.6464
-12.8027
-10.7040
-11.4509
-10.5210

7.9333
-10.2829
-12.2071
-6.5167
-8.1756
-7.6300
-7.0391
-5.8980
-3.9027
-5.1510
-7.9400
-6.9318
-4.0614
-2.3530
-4.5182
-5.0591
-2.8780
-1.3330
-0.4050
0.9900
2.4890
-1.3867
-2.9080
-1.4880
0.1000
*


13.8108
12.4368
8.3613
16.4451
9.6017
15.7674
18.4883
19.4667
16.8135
12.1094
15.1220
12.4508
11.7270
10.5425
18.1465
18.5266
20.3875
21.5222
19.9868
16.5501
17.4982
15.0278
16.8103
19.9765

4.6910
20.6221
19.8284
11.8859
15.6177
11.9803
12.4260
14.7376
12.8579
9.8510
15.5492
13.2817
11.0249
11.4946
10.4378
11.2689
11.8429
11.1548
9.8689
9.2382
8.7589
11.9495
11.6000
10.9220
9.5571










Table 6. Mean basis and standard deviations for
steers, Okeechobee, Florida, 1972-1982


300/400 lb Medium 2


Approximate
Week month and week Mean basis Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May 1
2
3
4
June 1
2
3
4
5
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5


3.2437
1.1440
2.2900
0.0200
2.7800
-0.7936
-1.6800
-2.6636
-2.6800
0.2522
-3.0909
-3.6940
-1.4910
-1.1570
-3.7582
-3.5845
-3.7073
-3.9191
-3.5091
-3.5327
-4.8709
-1.3127
-3.2009
-2.3710
-1.1925

-1.6225
-2.8857
0.6083
-0.0089
0.4950
0.6427
2.1745
3.0518
2.0115
0.2822
0.1818
1.9727
3.0720
2.1864
2.7818
3.8970
6.1170
6.4200
6.2900
7.1140
5.4467
3.3795
3.6120
4.5000
*


6.2268
6.8464
4.5763
8.9863
5.3847
10.1070
11.6107
10.9989
9.3421
6.8469
10.2519
8.5633
7.7913
7.0093
9.7950
12.0063
12.8755
13.6351
12.6459
11.6731
12.3702
9.6281
9.1538
11.5159
11.8439

10.4954
11.9616
5.8671
9.0385
6.7437
7.8083
8.9074
7.2861
5.1443
8.8663
7.0690
6.3427
7.3876
7.0158
6.5497
5.9160
5.8469
4.7169
5.4703
5.5894
6.9781
6.0345
6.4971
5.8484










Table 7. Mean basis and standard deviations for 400/500 lb Medium 2
steers, Okeechobee, Florida, 1972-1982

Approximate
Week month and week Mean basis Standard deviation

1 January 1
2 2 5.0562 3.0030
3 3 3.4440 4.0283
4 4 5.1650 3.2831
5 February 1 4.5700 4.9960
6 2 5.9550 2.7493
7 3 3.3655 5.4710
8 4 2.8075 7.1776
9 March 1 2.6773 5.2349
10 2 2.1155 3.1204
11 3 4.3911 3.4893
12 4 1.1850 4.7885
13 5 0.0622 4.9332
14 April 1 1.9989 3.3394
15 2 2.7589 3.7265
16 3 1.3890 3.8229
17 4 0.5320 6.5874
18 May 1 1.0820 9.4337
19 2 1.8082 8.1689
20 3 2.3318 6.8385
21 4 2.2627 7.4509
22 June 1 0.6518 7.0407
23 2 3.3009 6.1367
24 3 2.5036 4.9942
25 4 3.1790 6.4022
26 5 2.9825 7.3781
27 July 1
28 2 1.9400 6.2775
29 3 1.7929 6.8452
30 4 4.8964 4.2871
31 August 1 5.0189 4.7513
32 2 3.8950 4.1301
33 3 5.4382 3.1000
34 4 5.9473 4.8276
35 September 1 6.3473 4.0464
36 2 5.1740 3.0666
37 3 4.7544 4.0907
38 4 4.9091 2.8797
39 5 6.4727 3.3444
40 October 1 7.2970 4.3093
41 2 6.5500 3.6694
42 3 6.8273 4.0777
43 4 7.2220 4.6613
44 November 1 8.5420 4.5012
45 2 9.4700 3.5524
46 3 8.5150 3.4583
47 4 9.6140 4.3910
48 December 1 8.1411 4.2877
49 2 7.6420 2.8876
50 3 7.2745 4.2249
51 4 7.4250 4.6063
52 5 .











Table 8. Mean basis and standard deviations for
steers, Florida average, 1972-1982


600/700 lb Medium 2


Approximate
Week month and week Mean basis Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May 1
2
3
4
June 1
2
3
4
5
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4


10.4500
9.6815
10.3929
10.1950
9.9578
9.9270
8.2056
9.6545
8.7770
9.7882
9.0227
8.8490
9.5536
10.1680
9.8895
9.2820
9.6791
8.9900
9.1045
8.9445
8.4020
8.9240
9.1133
9.5241
7.7750

7.9400
8.8286
8.1500
9.3244
9.3950
10.1427
13.0245
10.3700
10.1965
10.5337
10.7614
11.9500
10.7345
11.1864
12.7937
12.5064
12.2700
13.5773
15.0620
15.0832
13.1564
13.1395
11.9627
*
*


3.5204
2.7682
3.2308
3.9253
3.0089
3.8761
1.5365
3.3039
2.5048
2.8654
2.7499
3.0762
2.6179
3.2037
2.7849
1.0729
2.6182
4.3596
3.5471
4.0322
3.5390
4.0421
4.7279
3.7448
2.4441

2.8061
3.4957
1.6921
3.0683
2.9225
2.9260
8.4512
3.5770
2.7991
4.4718
4.5414
4.0139
3.7808
4.2836
4.3355
5.1709
5.2563
5.3096
5.3721
4.9640
4.0959
4.9540
4.5453

*










Table 9. Mean basis and standard deviations for
heifers, Okeechobee, Florida, 1972-1982


400/500 lb Medium 2


Approximate
Week month and week Mean basis Standard deviation


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May I
2
3
4
June 1
2
3
4
5
July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5


8.8687
9.2190
9.5150
9.1200
10.5050
9.8882
8.2950
8.0864
7.0927
9.0856
7.4475
7.3956
8.9989
11.2793
8.1640
10.1772
8.3195
8.5355
7.7295
8.3082
8.0155
9.5290
9.3332
8.8040
7.5200

7.9712
9.3286
9.9321
9.9494
9.0825
10.2109
10.1859
12.8970
10.0800
8.6294
9.7727
11.2000
11.9470
10.2318
11.6227
11.5845
11.3295
14.5825
14.5275
13.9515
13.7383
13.0295
13.8870
13.2000
.


3.7910
3.4749
2.6839
3.9334
3.9168
5.6712
4.6498
4.9054
3.4096
4.2156
3.7869
4.8022
4.5121
4.2478
4.8413
5.7841
6.2319
6.9007
6.0120
6.4085
6.1948
5.8588
5.3827
5.2600
5.9439

4.0708
4.1936
6.1168
4.5509
4.8142
3.5969
4.5258
3.2695
5.4140
5.2159
4.9389
5.2623
5.5297
5.3540
5.6365
7.0244
5.7898
5.0992
5.4903
8.2533
3.9683
4.5687
3.6116
3.1138
*













10


5


0


CsO



S-15-


0 -20-


-25-
m

-30-


-35-


-40-
1 2 3 4 5 6 7 8 9 10 11 12

Month



Fig. 1. Average monthly basis for Medium 1 steers, 200-300 pounds, Okeechobee,
Florida, 1972-1982
























-5



-10



-15



-20


-25-



-30 -
1 2 3 4 5 6 7 8 9 10 11 12

Month



Fig. 2. Average monthly basis for Medium 1 steers, 300-400 pounds, Okeechobee,
Florida, 1972-1982













10.0


7.5



5.0


2.5



0.0



-2.5


-5.0


-7.5



-10.0 -
1 2 3 4 5 6 7 8 9 10 11 12
Month



Fig. 3. Average monthly basis for Medium 1 steers, 400-500 pounds, Okeechobee,
Florida, 1972-1982

















I 4%
I 4
I
I
I


4-



2



0-
i I I I I I I I I I I
1 2 3 4 5 6 7 8 9 10 11 12

Month




Fig. 4. Average monthly basis for Medium 1 steers, 600-700 pounds, Florida,
1972-1982

















1 0 / 00


-5 ----
Co)
L.

C, -5


-10 -


*j -15


-20-


-25-


-30-
1 2 3 4 5 6 7 8 9 10 11 12
Month







Fig. 5. Average monthly basis for Medium 2 steers, 200-300 pounds, Okeechobee,
Florida, 1972-1982





















6


3


0


-3


-6


-9


-12


-15
1 2 3 4 5 6 7 8 9 10 11 12
Month



Fig. 6. Average monthly basis for Medium 2 steers, 300-400 pounds, Okeechobee,
Florida, 1972-1982















/ \

/ 4
C~I
I I I \ '' I0


1 2 3 4 5 6 7

Month


Fig. 7. Average monthly basis for Medium
Florida, 1972-1982


8 9 10 11


2 steers, 400-500 pounds, Okeechobee,


15.0


12.5


10.0


7.5


5.0


2.5


0.0


-2.5


-5.0


-7.5


-10.0












20






16- /



14-
I'
I '4







C) I
12 --2 3 4 5 6 7 8 9 10 11 12


210-



8-



6-



4-
1 2 3 4 5 6 7 8 9 10 11 12

Month



Fig. 8. Average monthly basis for Medium 2 steers, 600-700 pounds, Florida,
1972-1982













'P
/
/
/
/,


%--/


1 2 3 4 5 6 7 8 9 10 11


Month


Fig. 9. Average monthly basis for Medium 2 heifers,
Florida, 1972-1982


400-500 pounds, Okeechobee,


20.0



17.5



15.0


0
0)
a

0



CO

C


12.5



10.0



7.5



5.0


2.5



0.0













20-


10- -


0-

.00



-20 -


o o


-40


-50-


-60


-70-


-80-

72 73 74 75 76 77 78 79 80 81 82

Year


Fig. 10. Average annual basis for Medium 1 steers, 200-300 pounds, Okeechobee,
Florida, 1972-1982


















o 4


CL / 4
,.."0





S-20 -


M -30 -


-40-



-50-
72 73 74 75 76 77 78 79 80 81 82
Year







Fig. 11. Average annual basis for Medium 1 steers, 300-400 pounds, Okeechobee,
Florida, 1972-1982













10 -







(1) ~\
S\ I
aY

f-5 -

00

S-10



-15-



-20


72 73 74 75 76 77 78 79 80 81 82
Year



Fig. 12. Average annual basis for Medium 1 steers, 400-500 pounds, Okeechobee,
Florida, 1972-1982













15-

14-

13- \
/
12- /
I
9-
11- /
p S


L- I /\
9 I\















72 73 74 75 76 77 78 79 80 81 82
Year




Fig. 13. Average annual basis for Medium 1 steers, 600-700 pounds, Florida,
1972-1982
4-

3-

2-








1972-1982













20


/



-10 \ /
.10








-50 -



-60 -
CO


-40 -


-50 -







-60-1
72 73 74 75 76 77 78 79 80 81 82
Year



Fig. 14. Average annual basis for Medium 2 steers, 200-300 pounds, Okeechobee,
Florida, 1972-1982
















10 -



i //

O \ //

-5-
0 -10








-20 -


-25






Year







Fig. 15. Average annual basis for Medium 2 steers, 300-400 pounds, Okeechobee,
Florida, 1972-1982
-20-


-25-


-30-











Florida, 1972-1982











15-


12-




I-
6- ,





S,0
Cu
0O
Co-






-93
& -6-\





-12-


-15 -
72 73 74 75 76 77 78 79 80 81 82

Year



Fig. 16. Average annual basis for Medium 2 steers, 400-500 pounds, Okeechobee,
Florida, 1972-1982











20.0-


--
17.5- "


15.0
"' A

S 2.5- \ /
SI'


S0.0- I
. I
0
0
7.5-


5.0-


2.5-


0.0-
72 73 74 75 76 77 78 79 80 81 E
Year


Fig. 17;. Average annual basis for Medium 2 steers, 600-700 pounds, Florida,
1972-1982


12













































S71 72 73 74 75 76 77
D 71 72 73 74 75 76 77


78 79 80 81
78 79 80 81 82


Year


Fig. 18. Average annual basis for Medium 2 heifers, 400-500 pounds, Okeechobee,
Florida, 1972-1982


17.5-


15.0 -



12.5 -


Co

L-
C"c
0
a


M0


10.0 -



7.5-



5.0-


2.5-



0.0-



-2.5 -














Appendix I


Basis


Buying a
contract




Cash market


Cash prices

Closing basis


Feeder cattle
futures


Futures market



Futures prices

Hedging


Definitions



- The spread or difference between a futures price
and the current spot or cash price. A nearby ba-
sis would be the difference using the nearest fu-
tures contract to maturity. Basis may also be
used to designate price differentials between cash
and more distant futures, as well as different lo-
cations as specified.


- Cattle producers buy contracts back to offset or
liquidate their hedged position (short hedge posi-
tion) in the futures market. They then sell their
cattle in the local cash market.

- Also called the spot market, it is for sale of
goods for cash and immediate deliver.

- Prices quoted on the cash or spot market.

- The difference between futures prices and local
cash prices on the day of sale.


- Refers to a 44,000 pound contract or price for
feeder cattle weighing between 575 and 700 pounds.

- An organized exchange market in which contracts
whose fulfillment by delivery of goods is not re-
quired until a specified time in the future.

- Prices quoted on the futures market.

- Briefly stated, hedging is the sale of futures
against the physical commodity or its equivalent,
as protection against a price decline; or the pur-
chase of futures against forward sales or antici-
pated requirements of the physical commodity, as
protection against a price advance.














Live cattle
futures



Narrowing basis


Selling a
contract



Short position



Spot price


Widening basis


- Refers to a contract and contract price for
slaughter cattle weighting between 1,050 and 1,200
pounds.

- The spread between futures and cash prices becomes
smaller overtime.


- Cattle producers sell contracts when they agree to
deliver a specified number of cattle per a con-
tract based on a price set by the futures market.

- Also known as "going short," means that a cattle
owner has sold a contract. This is done by pro-
ducers to offset risk from prices falling.

- The price at which a physical commodity is selling
at a given time and place.

- The spread between futures and cash prices becomes
larger.














Appendix II


Feeder Cattle Contract
Specifications at the
Chicago Mercantile Exchange



Commodity Specifications

Each contract shall be for feeder steers of Medium Frame and the
lower 2/3 of the Large Frame size and Number One (1) muscle thickness
and the top 1/3 of the Number Two (2) muscle thickness, as defined in
official United States Standards for grades of feeder cattle in effect
as of the opening of the contract.




Futures Call

The trading unit is 44,000 pounds of feeder steers consisting of
the USDA Number One (1) muscle thickness and not more than thirteen
(13) head of the top one-third (1/3) of the USDA Number two (2) muscle
thickness.




Par Delivery Unit

A par delivery unit is 44,000 pounds of feeder steers averaging
between 575 and 700 pounds.




Weight Deviations

A delivery unit averaging over 700 pounds and up to and including
750 pounds per animal is deliverable at a discount of 3 cents ($0.030)
per hundredweight (computed for the entire delivery unit) for each
pound, or fraction thereof, by which the average weight exceeds 700













pounds. In addition, a delivery unit averaging over 750 pounds and up
to and including 800 pounds per animal is deliverable at a discount of
5 cents ($0.050) per hundredweight (computed for the entire delivery
unit) for each pound, or fraction thereof, by which the average weight
exceeds 700 pounds.




Grade Deviations and Substitutions

Delivery units containing not more than 10 top 1/3 of USDA number
2 muscle thickness beyond the 13 head allowance for top 1/3 of USDA
number 2 muscle thickness in the par delivery unit shall be deliver-
able at a discount of $4.00 per hundredweight in addition to any other
allowances. For purposes of computing such discounts, the weight of
number 2 muscle thickness steers in excess of the 13 head allowance
shall be considered the same as the average weight of the delivery
unit.




Delivery Points Allowances

Par delivery of feeder cattle shall be made from approved live-
stock yards in Omaha, Nebraska; Oklahoma City; or Souix City, Iowa.

Deliveries may also be made from following approved livestock
yards at the indicated discounts. Kansas City and St. Joseph Missouri
at 25 cents ($0.25) per hundredweight. St. Paul, Minnesota; Greeley,
Colorado; Dodge City, Kansas; Armarillo, Texas at 75 cents ($0.75) per
hundredweight, and Montgomery, Alabama at 6 dollars ($6.00) per hun-
dredweight.














Appendix III


Certificate of Delivery



Beginning with the December, 1983 contract cattlemen desiring to
deliver cattle rather than liquidating their "short" or hedged posi-
tion by buying an offsetting contract will utilize a "certificate of
delivery." Under this new delivery system, a certificate is completed
three days before delivery and placed on a "posting board" between
1:00 and 3:00 p.m. of the first day. Any trader in a long position
can accept it between 1:30 and 3:30 p.m. If no longs accept delivery
by 3:30, the oldest long is required to accept delivery or pay a $600
penalty to the clearing house. If the delivery is refused, it is
posted again on the afternoon of the second day. If a long accepts
delivery the second day, that person receives the $600 as a premium.
The short hedgerr with the cattle) may take a long position and also
accept the delivery and the $600. If no one accepts delivery of the
cattle on the second day of posting, the longest long must accept or
pay a $600 penalty. On the third and final day the oldest long must
accept delivery, but also receives the $1,200 premium which goes with
it.

The unique system of economic incentives described above is de-
signed to facilitate cattle delivery by making it easier to liquidate
positions or receive deliveries. An objective is reducing the number
of times cattle are redelivered to satisfy a short futures position,
a process that unduly stresses cattle and adds to marketing expenses.
Overall, a hedger who decides to deliver cattle against the contract
rather than buying an offsetting contract and thus selling the cattle
in the cash market, simply has to notify the CME of delivery and then
arrange for shipping when notified of time and place.













Appendix IV


Approximate Relationship
within the Month


Between Week


Number and Month, and Week


Approximate Approximate
Week month and Week month and
Number week number week


January 1
2
3
4
February 1
2
3
4
March 1
2
3
4
5
April 1
2
3
4
May 1
2
3
4
June 1
2
3
4
5


July 1
2
3
4
August 1
2
3
4
September 1
2
3
4
5
October 1
2
3
4
November 1
2
3
4
December 1
2
3
4
5





















I.


Eit




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