Basis Variability on the Feeder Cattle Contract Versus the Failed Stocker Contract

Authors

Dillon Feuz, University of Nebraska-Lincoln
Sebastian Perversi, University of Nebraska-Lincoln
Wendy Umberger, Colorado State University, Fort Collins, CO

Date of this Version

January 2004

Comments

Published in 2004 Nebraska Beef Cattle Report. Copyright © 2003 The Board of Regents of the University of Nebraska.

Abstract

Basis variability was compared in 10 markets for 550 and 750 pound steers using the Chicago Mercantile Exchange (CME) stocker and feeder indexes as a proxy for futures prices. Basis variability for 550 pound steers was significantly greater than basis variability for 750 pound steers. As market volume decreased and as volume variability increased, basis variability also increased. The failed CME stocker contract never attracted enough volume to remain a viable contract. One possible explanation for this contract failure is the basis risk associated with it was large enough to discourage producers from using the contract to hedge calves.