Feeder Cattle Basis Risk and Determinants

Abstract

The feeder cattle futures contract has been criticized in recent years as not providing an effective hedging instrument. Following historically volatile cattle markets in 2014-2015, feeder cattle basis risk escalated, fueling futures contract concerns. This study assesses these concerns, utilizing weekly auction data from 32 feeder cattle markets from 1992 to 2021. Examined for the first known time, feeder cattle market variation had a statistically and economically significant influence on basis risk. Basis variation differed across regions and marketing periods. Feeder cattle basis risk was historically high in 2014-2015 but declined to levels similar to 2011 by 2018.