Futures and basis

Definition

A futures contract is a standardized, exchange-traded agreement to buy or sell a set quantity of a commodity for a given contract month at a price set today. Dairy and cattle operations use them to price output ahead of time and to value inventory.

The contracts that matter for dairy and cattle credits, all on CME:

Contract	Code	Size	Settlement	Listed months
Live Cattle	LE	40,000 lb live steers or heifers	Physical delivery	Feb, Apr, Jun, Aug, Oct, Dec
Feeder Cattle	GF	50,000 lb, 700–899 lb steers	Cash, to the CME Feeder Cattle Index	Jan, Mar, Apr, May, Aug, Sep, Oct, Nov
Class III Milk	DC	200,000 lb milk	Cash, to the USDA Class III price as first released	Every month
Class IV Milk	GDK	200,000 lb milk	Cash, to the USDA Class IV price as first released	Every month

Specs as of November 2026 (CME rulebook chapters, product overview and fact cards). Deliverable LE animals weigh 1,050–1,600 lb depending on sex through the August 2026 contract, and 1,050–1,650 lb from the October 2026 contract. The Feeder Cattle Index uses 700–899 lb Medium and Large Frame #1 feeder steers. Earlier versions of the GF rule used 650–849 lb.

Prices are quoted in $/cwt (hundredweight, 100 lb). Options on each contract are also listed (see hedge coverage).

Basis is the local cash price minus the futures price, for the same time and commodity: cash − futures. A negative basis (“under”) means cash is below futures; positive (“over”) means above. Basis captures location, quality, sex, weight and timing differences that the standardized contract doesn’t. It is usually far more stable and predictable than the futures price itself, which is why it is forecast from history while futures are taken from the market.

For milk, a common basis is the farm’s mailbox price (net price received, see milk check) minus Class III futures for the same month.

A futures strip is the series of futures prices for consecutive months, used to project prices or value inventory month by month. For contracts not listed every month (cattle), each calendar month maps to the next listed contract at or after it.

Formula

Plain text:

basis (month)            = cash price (month) − futures price (contract for month)
expected cash (month)    = futures (contract for month) + expected basis (month)
expected basis (month)   = average of historical basis for that month (e.g. last 3–5 years)
contract for month m     = first listed contract month ≥ m

LaTeX:

b_m = P^{\text{cash}}_m - F_{c(m)}, \qquad \hat{P}^{\text{cash}}_m = F_{c(m)} + \bar{b}_m

c(m) = \min\{\, c \in \text{listed months} : c \ge m \,\}

Example strip for Live Cattle: January and February map to February; March and April map to April; and so on. November and December map to December.

How to pull it in DC305

DC305 is not the source. Futures settlements come from CME Group (or a broker or data vendor); cash prices come from USDA AMS Market News reports, sale records and milk statements; USDA class prices come from the Federal Milk Marketing Order announcements (see FMMO class prices).

DC305 supplies only the quantities that the strip is applied to: head by class (see dairy cattle inventory classes) and, for milk, production by month.

Typical range

Herd context: US fed cattle, feeder cattle and Class III/IV milk; basis varies by region, season and quality.

Fed cattle basis: often within about ±$5/cwt of the nearby LE contract in major feeding regions; wider elsewhere.
Feeder cattle basis: varies widely by weight, sex and region; lighter calves often trade at a premium per cwt to the GF index weight.
Milk basis (mailbox − Class III): varies by order and component levels; in some regions and months it is positive, in others negative by several dollars per cwt.
Basis history window: 3–5 years of same-month history is a common forecast basis.

Common mistakes

Getting the sign wrong. Basis is cash − futures, not futures − cash.
Calling the nearby futures price the “cash price”.
Mapping a month to the previous contract instead of the next listed one at or after it.
Using a basis computed against a different contract month than the one being forecast.
Mixing Class III and Class IV basis for a farm whose milk check is driven by a different class mix.
Treating basis as fixed. Hedging with futures locks the futures price, not the basis.
Quoting the wrong units: $/cwt vs $/head vs $/lb.