Suppose you are a cattle feedlot operator who plans to buy 250 feeder steers in late April at your local auction market. Assume each animal weighs 600 lbs (pounds). The current local cash price is $1.36/lb. Suppose the current price of May 2020 feeder cattle futures is 140.000 ($1.40/lb) and the feeder cattle contract represents 50,000 lbs.

You want to hedge your upcoming feeder cattle futures purchase using the May futures contract. Consider what would happen if on May 1, the cash price is $1.275/lb and the futures price is 133.000. Answer the following questions about this hypothetical hedge.

Q 1) What is the current basis (in $/lb) at your local cash market (relative to May futures)?

Q2) What is the cash price you pay for physical feeder cattle on May 1?