4 pp., 1 tableKnowledge of historical basis patterns can be useful when estimating expected sale or purchase prices at the conclusion of  a futures or options hedge, when evaluating a current cash market quote, and when forecasting cash prices. This publication explains how livestock basis is computed, outlines an approach to developing a history of local basis levels, and discusses how historical basis data can be used to forecast basis

Bevers, Stan

Davis, Ernest E.

Dhuyvetter, Kevin C.

Mintert, James R.

Texas A&M University

Livestock Basis
James Mintert, Ernest E. Davis, Kevin Dhuyvetter and Stan Bevers*
Basis is the difference between the local cash market and a futures contract
price (Basis = Cash Price – Futures Price). Knowledge of historical basis patterns
can be useful when estimating expected sale or purchase prices at the conclusion
of a futures or options hedge, when evaluating a current cash market quote, and
when forecasting cash prices. This publication explains how livestock basis is
computed, outlines an approach to developing a history of local basis levels, and
discusses how historical basis data can be used to forecast basis.
A futures contract price represents today’s opinion of a commodity’s value at a
specific time in the future. Moreover, the futures price quote is for a specific
grade of the commodity at a particular location. On the other hand, a commodi-
ty’s local cash price represents the price at which buyers and sellers are willing to
trade the commodity on a particular date at a given location. Cash prices vary by
geographic location, actual grade or quality of the commodity, and, like futures
prices, by date. 
The difference between a commodity’s futures contract and cash prices, for a
particular grade at a specific location, is known as the basis. Basis is sometimes
referred to as the price of a cash commodity at a particular location, relative to a
specific futures contract, because it provides a measure of the local supply and
demand conditions vs. the aggregate supply and demand situation depicted by the
futures contract’s price.
Defining Basis
Mathematically, the formula for computing basis can be stated as:
Basis = Cash Price – Futures Price   (1)
The formula indicates that, if basis is negative, the futures price is greater than
the cash price. Conversely, a positive basis indicates the futures price is less than
the cash price.
Basis is usually computed using the nearby (closest to expiration) futures con-
tract. For example, in October the nearby corn futures contract is the December
futures contract and the December contract is generally used to compute
basis for corn to be delivered in the fall. Similarly, in January the near-
by live cattle futures contract is the February contract since it is
the contract closest to expiration. 
Livestock basis is always computed using the nearby (closest
to expiration) futures contract since, generally, it is not possi-
ble to store livestock into the expiration period of a subse-
quent futures contract. However, grain basis can be computed
using a deferred futures contract price. A deferred futures con-
tract is any futures contract farther away from expiration than
the nearby futures contract. For example, in the fall you could
choose to compute corn basis using the July corn futures contract,
which is a deferred contract since the December contract is the nearby
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L-5263
RM2-4.0
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*Extension Agricultural Economist, Kansas State University Agricultural Experiment Station and Cooperative
Extension Service; Professor and Extension Economist, The Texas A&M University System; Extension
Agricultural Economist, Kansas State University Agricultural Experiment Station and Cooperative Extension
Service; Assistant Professor and Extension Economist, The Texas A&M University System.
contract in the fall. It makes sense to do this
with grains because they are a storable commod-
ity, unlike livestock. Computing grain basis
using a deferred futures contract makes it possi-
ble to evaluate expected changes in the basis
over a long period of time. This can be helpful
when evaluating storage profitability.
Basis is much easier to predict than either the
cash or futures price. This is because most of
the factors that influence a commodity’s price
affect both cash and futures prices simultane-
ously. Usually there is a one-to-one relationship
(approximately) between cash and futures
prices. This means that cash and futures prices
tend to move together. That is, if live cattle
futures prices go up by $1.00 per hundred-
weight (cwt.), cash prices also tend to go up by
$1.00 per cwt.  There are times, particularly in
the grains, when something other than a one-to-
one relationship between cash and futures
prices can be expected. The ability to anticipate
these situations can create a profit opportunity.
Using Basis Information
The mathematical formula used to compute
basis is a powerful tool. If we rearrange equa-
tion (1) and solve for the cash price we discover
the following relationship:
Cash Price = Basis + Futures Price   (2)
Hedgers can use basis for the time frame
when they expect to deliver (or accept delivery
of) the cash commodity to estimate their 
expected price if they place a hedge at today’s
futures price level. This works because a hedger
effectively locks in the futures price when the
futures contract is sold, in the case of a short
hedger, or when the futures contract is pur-
chased, in the case of a long hedger. Effectively,
this means that the difference between a
hedger’s actual price, at the conclusion of the
hedge, and the expected price, at the outset of a
hedge, will be attributable to the difference
between the actual and expected basis.
Suppose, for example, it is currently April and
you will have fed cattle ready for market in
September. The October Live Cattle contract is
currently trading at $71 per cwt. But what does
that mean to you when feeding and selling fin-
ished steers in Hereford, Texas?  To more accu-
rately estimate what your actual selling price
might be, you would need a basis estimate for 1)
fed steers, 2) at Hereford, Texas, and 3) during
September. Suppose, historically, such a basis
had averaged – $2.00 per cwt., then your esti-
mated selling price would be $69 per cwt. If
pricing through the futures market with an
October Live Cattle contract, this would be the
best estimate of your September fed cattle sell-
ing price in Hereford, Texas. This is the first and
foremost use of estimate basis.
Knowledge of historical basis levels also can
be useful when judging the acceptability of a
local cash market price. As equation (2) indi-
cates, a commodity’s cash price can be separ-
ated into its futures price and basis components.
The basis component can be compared with his-
torical basis levels for that particular time of
year and a judgement made regarding the
acceptability of the cash price. If the basis dif-
fers substantially from historical levels, some
additional research to determine why the differ-
ence exists and whether it is likely to persist is
warranted. 
Finally, you can forecast the cash price by
replacing basis with expected basis.  In this case
the formula becomes:
Expected Cash Price = Expected Basis + Futures
Price   (3)
This means you can use a basis forecast, in
conjunction with the futures price, as a cash
price forecasting tool. The technique is straight-
forward. Simply add today’s futures price
(choosing the futures contract that will be the
nearby contract during the forecast period) and
a forecast of the basis during the forecast period
to obtain a cash price forecast. To clarify,
assume that you need a western Kansas fed
steer cash price forecast for mid-November. Take
today’s December live cattle futures price and
add a forecast of the mid-November western
Kansas slaughter steer basis to the futures price.
The result will be an expected mid-November
cash price, based upon today’s futures market
price and your basis forecast. This futures-based
price forecast can then be compared to forecasts
from alternative sources such as university
Extension economists, the U.S. Department of
Agriculture and market advisory firms. 
Constructing Historical Basis Tables
Basis tends to follow the same pattern year
after year. As a result, historical basis data can
be used to forecast basis. The first step to fore-
casting basis is to generate a historical basis
table to compare basis across years. Setting up
basis tables on a weekly basis is the preferred
approach because it provides enough detail to be
useful for forecasting without requiring that you
spend an inordinate amount of time collecting
prices.
Both feeder cattle and lean hog basis can be
computed one day per week for most markets.
Feeder cattle auction markets typically trade just
one day per week. As a result, cash prices are
only available one day per week. When per-
forming the feeder cattle basis computations, it
is important to use the futures and cash price
from the same date. Lean hog basis data for
major markets also can be recorded just one day
per week because most hog markets trade every
day. To avoid holidays, recording the closing
cash and futures prices on Wednesday is often a
good choice. 
Unfortunately, computing and recording
slaughter cattle basis one day per week is not
satisfactory. Many cash slaughter cattle markets,
such as western Kansas slaughter cattle, don’t
trade every day. As a result, picking a single day
per week (for example, every Wednesday) to
compute basis will yield a surprisingly large
number of weeks with no basis to report, simply
because the cash trade occurred on days other
than the one chosen. To avoid this problem, you
can average both cash and nearby futures prices
for the week and use them to calculate weekly
average basis.  Whether you choose the weekly
average technique or one day per week
approach, it’s important that you use the same
technique from week to week and year to year
to ensure consistency. 
Calculating the weekly average basis for
slaughter cattle requires that a rule be estab-
lished regarding when to change the futures
contract used to compute basis. One rule that
works well for livestock basis is to continue
using the futures contract closest to expiration to
compute the weekly average futures price, as
long as it continues to trade the entire week. If
the nearby contract expires during the middle of
the week, switch all of your calculations for that
week to the next closest to expiration contract.
To clarify, examine how this rule would have
been employed with the October 1997 and
December 1997 live cattle futures contracts.
October live cattle futures expired on
Wednesday, October 22. Consequently, the last
week to compute live cattle basis using the
October contract was the week ending Friday,
October 17. Basis for the week ending October
24 was computed using the December live cattle
futures contract, because by the end of that
week, it was the new nearby futures contract.
Remember, anything that affects cash prices
will affect basis. For example, since feeder steer
and heifer basis is computed using the same
futures contract, feeder steers and heifers will
generally have a much different basis because
heifer prices typically trade at a substantial dis-
count to steer prices. Similarly, different feeder
cattle weight classes will also have substantially
different basis levels and patterns because light
weight cattle prices generally trade at a pre-
mium to heavy weight cattle prices and follow a
different seasonal pattern. As a result, it’s
important to have data available for the appro-
priate sex and weight since it can have a big
impact on basis. 
Other factors that influence cash prices also
can have a big impact on basis. Prices for
Choice and Select slaughter cattle vary, and as a
result, these two quality grades have a different
basis pattern. Similarly, there is a wide variety
of physical characteristics that influence cash
sale prices for feeder cattle, all of which can
affect the basis for a particular pen of steers or
heifers. Lean hog prices vary depending on the
carcass weight and the percentage of the carcass
that is lean meat, which means both these char-
acteristics will affect lean hog basis.
Forecasting Basis
Since basis tends to follow the same pattern
year after year, historical basis data can be used
to help forecast future basis levels. The basis
tables described previously can be a great help
when forecasting livestock basis. The simplest
technique, and one of the most reliable, is to use
the historical average basis level for the week
you are interested in as a forecast. Recent
research indicates that, generally, 3-year aver-
ages are preferred when forecasting feeder cattle
or slaughter cattle basis (Dhuyvetter and
Parcell). Comparable research regarding the
appropriate historical average to use when fore-
casting lean hog basis is not available, but it’s
likely that a 3- to 5-year average will perform
well.
Forecasting Example
Table 1 provides historical weekly feeder steer
basis data for steers weighing 700 to 800 pounds
that were sold at the Winter Livestock Auction
in Dodge City, Kansas. If you are interested in
forecasting basis for 700- to 800-pound steers to
be marketed in southwest Kansas the week of
October 15, 1998, it’s reasonable to expect basis
to be near the 3-year average of negative $0.27
per cwt. However, remember that the actual
basis could be above or below that level. 
Updated Basis Information Available on
the World Wide Web (WWW)
Although it’s best to maintain your own 
historical basis data for markets that you cus-
tomarily use, current livestock basis data for
several major markets is available from Kansas
State University on the WWW. Point your 
web  browser to the following address
www.agecon.Ksu.edu/livestock
to obtain historical livestock basis information
for feeder cattle (Dodge City, Kansas), slaughter
cattle (western Kansas direct, 1100- to 1300-
pound steers) and lean hogs (Western Cornbelt
Lean). Weekly historical basis charts are avail-
able for each futures contract and the nearby
basis chart is updated each week. In addition,
the Texas Agricultural Extension Service has his-
torical feeder cattle and calf basis available for
many Texas auction markets, as well as for the
Texas Panhandle slaughter cattle trade.
References
Dhuyvetter, K.C. and J. L. Parcells.
“Understanding and Forecasting Cattle Basis.”
Paper presented at the Kansas State
University Cattle Profitability Conference,
Manhattan, Kansas, August 14-15, 1997.
Kastens, T. L., R. Jones and T. C. Schroeder.
“Futures-Based Price Forecasts for
Agricultural Producers and Businesses.”
Journal of Agricultural and Resource Economics,
Forthcoming, 1998.
1997 1995 1996 1997 3-Year
Dates $/cwt. Average
10/1 1.23 -0.12 -1.88 -0.26
10/8 1.29 -0.82 2.27 0.91
10/15 -0.01 -0.34 -0.47 -0.27
10/22 1.29 -0.14 -1.10 0.02
10/29 N/A 1.98 -3.24 N/A
Partial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board,
and the Texas Farm Bureau.
Table 1. Dodge City, Kansas 700- to 800-
pound feeder steer basis, Chicago
Mercantile Exchange October feeder cattle
futures.
Produced by AgriLife Communications & Marketing, The Texas A&M System 
Extension publications can be found on the Web at: http://AgriLifebookstore.org
Educational programs of the Texas AgriLife Extension Service are open to all citizens without regard to race, color, sex, disability, religion, age or national origin. 
Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, and June 30, 1914, in
cooperation with the United States Department of Agriculture. Texas AgriLife Extension Service, The  Texas A&M System.
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