CHICAGO - It's high noon in the cattle market, where meat packers are having to pay huge premiums over benchmark futures for cash cattle, while futures traders bet that a series of misfortunes in the beef sector will soon weigh heavily on beef demand and market prices.
This spring fattened cattle at feedlots have sold to meat packers as much as $6 per hundredweight (cwt) over June live cattle futures as a devastating drought in the southern Plains shrunk supplies.
That an extra 5 percent return, in what the industry refers to as "basis value," has been a windfall for feedlots, which suffered one of their worst months ever in April due to high feed costs and expensive replacement cattle.
Traders and hedgers are not buying this industry prosperity. In fact, they are selling the futures, dropping prices 14 percent since early March, due in part to the furor then over "pink slime" in ground beef, which triggered a consumer backlash.
The differing opinions have opened an unusually wide basis gap between futures and cash prices. That gap averaged $6.22 per cwt in April, the widest since 2007 based on weekly data for trades in western Kansas, according to the Livestock Marketing Information Center.
"It's a tale of two different markets," said Don Roose, analyst with U.S. Commodities in West Des Moines, Iowa.
"In reality, the poor demand that the trade is currently factoring in is not as severe as expected," he said referring to the effects on futures from "pink slime" or what the industry labeled textured beef.
The spread has since shrunk, standing at $3.40 on Wednesday.
"Even with a $3 basis today there is incentive to move hedged cattle early because normally the basis narrows through contract expiration," said LMIC director Jim Robb. The June live cattle contract expires on June 29.
Cattle futures have been knocked off their peak by fears of sliding demand following an uproar over filler beef critics call "pink slime", falling from its record high of 131.250 cents per lb in March.
Futures also took a hard knock three weeks ago when U.S. authorities confirmed the first case in six years of Bovine Spongiform Encephalopathy, or mad cow disease, at a California dairy cow, although it did not enter the food chain.
But sellers of cattle in the cash markets, where prices have fallen by 8 percent from a record high $130 per cwt in early March are putting up a stout fight to keep prices from dropping further, banking on tight supplies.
Currently, feedlots can sell their hedged cattle in the cash market for about $120 per cwt and then buy back their short hedges in the futures for about $116, profiting on the $4 difference.