Decision support, BeefBasis.com helps producers forecast basis at local markets
Cowley – Upon his return from an education in business administration, which included using futures and hedging tools, Brett Crosby started putting his knowledge to work on his family’s cattle operation in the northern Big Horn Basin.
“I started using futures to hedge our prices, and found that the basis was very volatile, and would vary widely from year to year, from location to location and from weight class to weight class,” says Crosby of his experience.
In the meantime, he and his brother-in-law started Custom Ag Solutions and saw the opportunity for research funding from USDA’s Risk Management Agency (RMA) to look into more accurately forecasting basis.
“I thought it might be a good project to see if we could forecast basis, or see what drives basis, and how those drivers affect basis so farmers and ranchers could better understand how using futures markets really could protect them,” he explains.
After initial research into their options, the team contacted a group of researchers at Kansas State University who were already working on the topic.
“We contacted them and asked if they’d be interested in working on a project with us, and we ran our initial models and found that, for various weights at various locations, basis is a function of price expectations in the future, or what an animal will be worth when it goes to slaughter, and the cost to get the animal to slaughter weight, ” says Crosby. “We saw that basis is a function of both live cattle futures and corn futures.”
“We also saw that live cattle and corn futures were reflected in feeder cattle prices, so, using that, we built our models around feeder cattle futures,” says Crosby of where the system began.
Today that system has turned into BeefBasis.com, a free, web-based risk-management tool that allows producers to forecast basis for different types of cattle. Its motto is “Decision support for America’s beef producers.”
“What we have today is a lot more complex,” says Crosby of the current tool.
“I was on the site this morning to see what I could expect my calves to bring if I sold them this week, based on the current futures market. The price popped two bucks in the last two days, so I wanted to know, if I send them to town, how that would affect the price,” explains Crosby, giving an example of his personal use of the information.
The website can be used in a number of ways, including forecasting prices into the future.
“That’s a big deal, because order buyers say they want to contract a load of steers for March delivery, and ask what I want for them. It’s up to me to set the price, and they’ll say if they want to take it,” he notes. “Potentially, I could leave a lot of money on the table, or set the price too high, only to have them walk away. I can use BeefBasis to look out in March and say that, according to BeefBasis, my six-weight steers for March delivery should be in the $1.35 range, and I’ll tell the order buyer I want $1.35. That’s one way to use it.”
Crosby says another way to use the website is to protect prices, either through a futures market, options, Livestock Risk Protection (LRP) Insurance offered by RMA or a combination of those tools.
“I can use BeefBasis to determine how much protection I will enjoy with various positions in the futures and options market,” he says. “For example, if I have 100 steers and want to sell a perfect hedge, or 1.2 contracts, I’ll sell either one or two and use BeefBasis to determine my protection or over-protection. I can see how much protection I have of my net selling price given various market movements.”
In addition to those strategies, Crosby says the sheer amount of data available on BeefBasis.com can also help with marketing decisions.
“We had to use a lot of data to come up with these models, and all of it is available on the site. Producers can compare sale barn locations just to see how calves are selling, and I use this a lot to compare the Billings market to Miles City,” he explains. “The Miles City auction yard has changed hands, and the volumes have really picked up, so I use that comparison tool to see how the numbers and prices compare between the two sites.”
Although any sale barn that reports to USDA’s Agriculture Marketing Service (AMS) is included in the historical analysis, in Wyoming the two sale barns with enough historical data to develop a forecast are Torrington and Riverton. BeefBasis is built upon a minimum of 10 years of auction transaction data from AMS for each of the 25 states that are involved. The database includes cattle price, sex, lot size and location in its transaction records.
“In Montana, Miles City doesn’t have enough data for a forecast, but Billings does, so I run a forecast on Billings and compare Billings recently with Miles City to see what I can expect to realize,” he explains.
Crosby says beef producers can use the website and its tools in the same way no matter where they’re selling in the country.
“We have every sale barn in the country that reports to AMS, and every transaction from every sale barn in the country that reports in our database, and all of those can be downloaded,” he says.
The BeefBasis project has been funded through grants from RMA, and Crosby says he and his team are trying to automate it as much as possible, as the initial funding paid for initial development in 2007, and currently there is still a full-time person working on the site.
Of the future of BeefBasis, Crosby says the goal, if they can find the funding through advertising dollars or another grant, is to add live cattle basis to the site. They’re also working on a futures and options hedging tutorial that would simulate hedging using futures and options so producers could “practice” before going out on their own.
“We’re constantly updating it and making changes and improvements,” says Crosby of the project.