Question

You are going to sell your feeder cattle in the future and are afraid that prices will drop. Therefore, you decide to enter the futures market. The cash price today (March) is $1.71/lb. The September futures price today is $1.85/lb. Note that feeder cattle futures prices are normally reported in cents per pound, however, you do not have a cent sign on your keyboard so please convert your answers to $/lb like the context of the problem has done.

What is the current basis?
Use the above information as well as the following. We are in September in the future. The cash price has decreased to $1.66/lb and the futures price has decreased to $1.65/lb.

The basis in September has weakened, stayed the same, or strengthened?

Answer 1

The initial basis in March is +$0.14/lb, calculated by subtracting the cash price of $1.71/lb from the futures price of $1.85/lb. In September, the basis weakened, moving to -$0.01/lb as the cash price ($1.66/lb) fell below the futures price ($1.65/lb).

Step-by-step explanation:

The current basis can be calculated using the cash price and the futures price. The basis is the difference between the cash price and the futures price for the commodity. In the context provided, the current basis in March (when the prices are $1.71/lb cash and $1.85/lb futures) is calculated by subtracting the cash price from the futures price.

Current Basis = Futures Price - Cash Price
Current Basis = $1.85/lb - $1.71/lb
Current Basis = $0.14/lb

In September, the cash price is $1.66/lb and the futures price is $1.65/lb. The basis in September is then:

September Basis = Futures Price - Cash Price
September Basis = $1.65/lb - $1.66/lb
September Basis = -$0.01/lb

The basis has weakened because it has gone from +$0.14/lb to -$0.01/lb.