Wednesday, February 13, 2008
Kansas Slaughter Cattle Basis (Cash minus Futures)
Some of my IRM Cooperators are involved in finishing cattle so this should be of interest to those producers. This is the basis calculation (cash minus futures) prepared by Kansas State University for Kansas. This data is the average of the last 3 years. The basis for where you sell your cattle may vary a little from these but should follow this pattern. (I am working on getting some Eastern Wyoming/Western Nebraska basis data summarized.)
We know that there is generally a shortage of finished cattle around April -- some times also in March. We are out of old crop (2006) finished cattle and most new crop (2007) calves are not yet ready for the market.
This year I expect to see slaughter numbers really increase in June and July as more 2007 calves skipped winter wheat grazing went straight to the feedlot at weaning. I am not sure the market is really reflecting this yet.
Market prices tend to peak for the year in April when very few ranchers have finished cattle to market. The two groups of ranchers that can have finished cattle to market in April are (1) those that early weaned their 2007 calves and (2) those that calve Jan/Feb and wean in September.
For example, a producer selling his calf-feds in April 2008, should expect to sell his cattle $3 over the April futures prices. The projected basis range is from a +$2 to a +$4.75. Given the 12 Feb 08 Closing Apr08 contract of $94.77, this suggests a Kansas April 2008 slaughter cattle price of $97.77 -- not bad -- provided your breakeven price is lower; however, My PPP-MIS model for a "Winter Calving Cow Herd" has Jan/Feb born calves finishing in mid-Apr with a breakeven of $104/cwt.
Note the basis price goes negative around 1 July and stays negative for the rest of the year. When do you think most 2007 calves will be harvested? It is June, July, and August.
The ranchers that retains his calves, is rewarded if he is part of a production system that harvests his calves in April of each year.