Harrington's Sort & Cull
John Harrington DTN Livestock Analyst

Friday 08/15/14

Basis Anarchy

After all these years, I'm beginning to wonder if I ever actually understood the concept of livestock hedging. Traditionally schooled that cash and futures would eventually converge toward a predictable relationship, I suddenly feel like a geography graduate from Genoa State, class of 1491.

Late-summer basis levels are absolutely crazy, displaying strength (i.e., spot cash sales towering over nearby futures) never seen before in the annals of risk management history. On average, feedlot sales closed the week $5-6 over spot August live; sale barns sold 700-800-pound yearlings $6-$7 over spot August feeders; and pork producers sold butchers as much as $20 over new spot October lean hogs.

Short hedgers find such freaky behavior as cause for raucous celebration; long hedgers find the same as warrant to puke.

Former believers in the theory of convergence had been foolish enough to assume the considerably more modest suggestions of long-term price data in making third-quarter marketing plans: fed sales $0.50-1 under August live; yearling sales near par with August feeders; and finished barrows and gilts only $10-12 over October lean hogs.

The extraordinarily strong basis levels in cattle would seem to be a function of tight supplies of the physical commodity. In trading cash so far over futures, the market is essentially telling us that the air-sucking infrastructure of the beef industry places a greater value on real flesh-and-blood fats and feeders than the community of speculative investors can ever imagine.

The vaulted premium of the late-summer cash hog trade over the October lean contract is a bit tougher for me to appreciate. On one hand, October always goes into Labor Day with a big head start down the hill, aggressively anticipating the standard fall agenda of accelerating chain speed, amassing weekly pork production, and steadily sinking country prices.

Yet this year the CME is predicting the post-summer train wreck to be nearly double the usual disaster. Right or wrong, board bears seem to be betting heavily upon a big swing in PED implications. Relying on little more than the generalization that the dreaded disease is more manageable in warm temps than cold, lean hog specs are apparently willing to expect the worst in terms of a summer-fall sell-off.

In other words, while last winter's devastated pig crop set this summer's bullish stage, the following spring pig crop quickly recovered to near full production potential, paving the way for burdensome pork production over the next three months.

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John Harrington can be reached at feelofthemarket@yahoo.com

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(SK)

Posted at 2:42PM CDT 08/15/14 by John Harrington
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