Basis
−$5.00per cwt
- Basis is −$5.00 per cwt: $175.00 cash less $180.00 futures.
- Your cash price is $5.00 under futures.
How we work it out
- Basis = cash price − futures price.
- Price you expect = futures price you sell at + the basis you expect − the broker fee.
- Futures gain = price you sold at − price you buy back at.
- Price you get = cash price + futures gain − the broker fee.
Basis is from Georgia Extension B-1406. The hedge is Nebraska Extension's, in EC835. All prices are per cwt (100 lb).
An example from Nebraska
In October, a farmer sells March feeder cattle futures at $85. The farmer expects cash in March to be $4 over futures. So the farmer expects about $88.80, after the broker fee.
By March, futures fall to $80. The farmer buys them back and gains $5. Cash is $84.
$84 cash plus the $5 gain, less the fee, is $88.80. The hedge held the price.
Where to find prices
USDA AMS Market News reports are free. These come out each day:
Questions
What is basis?
Basis is your local cash price less the futures price. Steers at $175 cash with futures at $180 have a basis of −$5, says Georgia Extension.
What does a negative basis mean?
Your cash price is under the futures price. A positive basis means cash is over futures.
What is a short hedge?
You sell futures now, before you sell the cattle. When you sell the cattle, you buy the futures back. If prices fell, the futures gain makes up for the lower cash price.
Why can a hedge still miss?
The futures part locks in a price level. The basis can still move. If the basis comes in weaker than you planned, you get less, by that much.
Where do I find cash and futures prices?
USDA AMS Market News gives free cash prices every day. Its daily feeder cattle summary also lists the futures settle prices.
Sources
- University of Georgia Extension B-1406, Understanding and Using Cattle Basis in Managing Price RiskJun 2014Basis = cash price less futures price, and the example
- Nebraska Extension EC835, Hedging and Basis Considerations for Feeder CattleFeb 2005A short hedge: expected price, then the price you get
- USDA AMS, National Daily Feeder and Stocker Cattle SummarydailyFree cash prices, with the day’s futures settlements