CME proposes seasonal discount on cattle delivered to Worthing, South Dakota
March 16, 2016
Cattle producers in South Dakota, Iowa and Minnesota are a little upset.
On February 19, the CME Group announced their plans to conduct a review of the Worthing, South Dakota delivery point to decide if a seasonal discount, which would cost those who fulfill contracts through that delivery point $1.50 per hundredweight, would "facilitate a more orderly delivery process."
According to Todd Wilkinson, South Dakota Cattlemen's Association president and cattle feeder from central South Dakota, the proposed discount on contracts fulfilled through Worthing, South Dakota would put South Dakota, Minnesota and Iowa producers at a disadvantage.
The proposal is in response to requests from their customers, said Chris Grams, senior spokesman for CME Group. "It's one of the areas that customers have asked us to look at. Our goal is to continually listen to our customers and address what they bring up."
“The biggest issue to me is why single out Worthing. Just because occasionally we have this volume
— other places have the same issue, but there are no proposed discounts on them.” tTodd Wilkinson, SDCA president
Grams said he didn't have the information about which customers, or which segment of the industry was requesting the change.
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"Supposedly it's based on freight," Wilkinson said. "If you look at the number of miles between Worthing and the three closest packers, it's about 150 miles. That's only a few miles more than Ogallala, Nebraska, but they're not proposing to discount them."
According to the comments SDCA submitted, Worthing is an average of 151 miles from the three nearest packing plants, which is quite similar to the 144 miles Ogallala, Nebraska averages from their nearest plants or the 133-mile average distance for Wray, Colorado and the average distance of 132 miles for North Platte, Nebraska.
According to the CME's data, Worthing sees an unusually high number of cattle delivered there during October, and the discount is an attempt to achieve a more equal distribution of cattle deliveries across delivery points.
"Geographically dispersed deliveries will help ensure that expiring month prices reflect supply and demand factors across all delivery regions during all contract months, and prevent congestion at individual stockyards for USDA graders and stockyard personnel. Also, a discount applied to the Worthing stockyard would not be indicative of the quality of the cattle in the region, or of the quality of the stockyard itself, but rather of a localized seasonal supply/demand imbalance," the proposal reads.
According to SDCA's comments, "With more than 15,000 beef producers and 4 million head of cattle in South Dakota alone, this proposal is prejudicial to our state and region. Worthing is in the center of a viable cattle-feeding area that has seen a sharp increase in cattle on feed for the last eight years. The proposed freight discount will penalize a growing area while proposing no change for markets where cattle on feed numbers are declining."
The South Dakota Stockgrowers Association and R-CALF USA also submitted comments objecting to the proposal.
"This suggests that Worthing is the most competitive delivery point throughout the year for U.S. fed cattle producers that deliver live cattle," wrote the two cattle groups, as they reported in a press release.
If the proposal is accepted, producers will have the option of accepting the discount, which amounts to $600 on every 40,000-pound contract, or delivering their cattle to a different delivery point. The next-closest delivery point is Ogallala, Nebraska, about 400 miles from Worthing.
"The biggest issue to me is why single out Worthing," Wilkinson said. "Just because occasionally we have this volume—other places have the same issue, but there are no proposed discounts on them."
Wilkinson said this affects all the producers in the supply chain, not just the feeders who deliver the cattle to Worthing. He says he was talking to a group of cow-calf producers in Mobridge and told them, "People like me bid on your calves. If your cattle finish in September or October I'm going to be bidding $1.50 less because I'm facing that penalty."
SDSGA and R-CALF say the proposal would disrupt competitive market forces and stymie competition by artificially penalizing cattle producers who find Worthing to be their most profitable delivery point, while simultaneously subsidizing the other 12 delivery points that are not currently competitive with Worthing.
They also say it would encourage continued industry inefficiencies, such as the majority of cattle deliveries occurring in the north, while the most packer-plant capacity is in the south, putting the United States at a global disadvantage.
The third criticism leveled against the proposal by the two cattle groups is that the discount constitutes a punitive sanction imposed on certain fed cattle owners for no other reason than the geographic locations of their cattle feeding operations.
"This makes no sense and constitutes an unprecedented, unfair and punitive policy targeted at northern cattle feeders in general and Worthing-area cattle feeders in particular," their comments say.
"The proposal to impose a discount at Worthing, South Dakota, will harm northern cattle producers, harm competition, lock-in industry inefficiencies and penalize Worthing area cattle feeders. The beneficiaries of this proposal appear only to be fed cattle buyers that have, for whatever reason, resisted long-term competitive market signals that suggest more packing capacity is needed in the north and perhaps less capacity is needed in the south."
The comment period on the proposal closes March 21. The original comment period closed March 7, giving those affected just a little over two weeks to learn of the proposal, research the impact, and respond in writing.
The deadline for comments was extended based on feedback from customers and market participants, Grams said.
The proposal and comment information can be found on the CME website here: http://www.cmegroup.com/company/files/review-of-worthing-south-dakota-delivery-point-for-live-cattle.pdf
Comments can be submitted to Andrew Crafton, Commodity Research & Product Development, Andrew.Crafton@cmegroup.com, 312-634-8923 or Thomas Clark, Agricultural Products Business Line Management, Thomas.Clark@cmegroup.com, 312-930-4595.