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About BeefBasis - Decision Support for America's beef Producers

Custom Ag Solutions, Inc. (CAS) and Kansas State University (K-State) have partnered with the USDA’s Risk Management Agency (RMA) to conduct research and development activities to create a Cattle Basis Risk Analysis Tool (CBRAT) to provide producers with information and analytics to improve marketing decisions influenced by cattle basis risk.

CAS specializes in economic research, development and education projects in the ag sector, and they design and direct research and education projects involving a broad range of commodities and producer groups nationwide. CAS’owners’ have an eclectic combination of backgrounds in economics, corporate finance, and production agriculture that, combined, enable them to bring a unique perspective to their projects.

CAS’ president, Brett Crosby, owns and operates a cattle operation in Wyoming, and he has particular interest in the cattle industry. This project originated with Crosby, who recognized that the futures markets were ineffective hedging instruments for cow-calf producers. Essentially, volatile basis of the futures markets to lighter weight calves made these instruments largely useless as hedging tools.

Basis, defined simply as the difference between the local cash markets and futures contract prices, can be complex and can vary dramatically between weight classes and market locations from year to year. Understanding the risk related to basis uncertainty, or "basis risk," is essential to making effective use of price risk management tools such as Chicago Mercantile Exchange (CME) futures and options and forward contracts.

In 2005, the USDA’s Risk Management Agency issued requests for proposals to develop tools to help livestock producers manage market risk. A tool that more accurately forecast basis for calves of various weights at various locations seemed a perfect fit for RMA’s objectives. CAS was aware of K-State’s work on basis and price slides, and they approached Drs. Dhuyvetter and Mintert about proposing a project to develop such a tool. Together with K-State, CAS submitted the proposal, and the project was funded in October 2005.

The CBRAT was developed through research by K-State and CAS to identify and model regional basis characteristics. The completed CBRAT will provide producers with regional price slide and basis expectations, along with regionally optimized hedge ratios. Using the CBRAT, producers in 15 leading production states will access, analyze, and apply relevant pricing information to more effectively understand and manage price risk through available hedging tools.