CME Contract changes
The Chicago Mercantile Exchange has announced changes in their standards for cattle contracts. The United States Cattlemen’s Association sees value in the first change but is concerned with the second.
According to the USCA Region X Director Justin Tupper, his organization’s goal is to improve the environment for those rare occasions when delivery occurs on a cattle contract.
“We are trying to make sure we are delivering a product equal to the industry standard,” said the manager of St. Onge Livestock, St. Onge, South Dakota. The delivery process is “extremely complex,” with a lot of moving parts, he said.
“We needed new specifications because deliveries are very difficult today. We want to get more in line with what a real load of cattle would consist of.” He believes the first change accomplishes this because more and more cattle are grading choice.
Specifically, the CME plans to make the following changes on Sept. 9:
1. Implement a new par quality grade of delivered cattle of 70% choice, 30% select steers or heifers (the “New Grade”) of the Live Cattle Futures contract commencing with the February 2021 contract month and beyond;
2. Update the delivery weights for live-delivered steers to allow for delivery of animals up to 1,600 pounds of the Live Cattle Futures contract commencing with the February 2021 contract month and beyond. Delivery remains at par between 1,050 up to 1,500 pounds. Steers weighing more than 1,500 pounds but less than or equal to 1,575 pounds shall be deliverable at an adjustment equal to the 900-1000 lbs. factor from the USDA LM_CT155. Steers weighing more than 1,575 pounds but less than or equal to 1,600 pounds shall be deliverable at an adjustment equal to the 1000- 1050 lbs. factor from the USDA LM_CT155; and
3. delay the listing of the February 2021 contract month of the Contracts until the effective date of this submission, Monday, September 9, 2019 (collectively, the “Rule Amendments”
The first change will help increase demand for higher quality cattle, Tupper believes, as it is a change from the current par quality grade of 65 percent choice, 30 percent select.
The CME said the first change is intended to more closely align the standard with the average quality of cattle being transacted.
The second change increases the upper limit for live delivery of steers by 50 pounds.
The CME explained, “we are updating the delivery weights for live-delivered steers to allow for delivery of animals up to 1,600 pounds of the Live Cattle Futures contract commencing with the February 2021 contract month and beyond. Delivery remains at par between 1,050 up to 1,500 pounds. Steers weighing more than 1,500 pounds but less than or equal to 1,575 pounds shall be deliverable at an adjustment equal to the 900-1000 lbs. factor from the USDA LM_CT169. Steers weighing more than 1,575 pounds but less than or equal to 1,600 pounds shall be deliverable at an adjustment equal to the 1000-1050 lbs. factor from the USDA LM_CT169. Currently, no steer weighing more than 1550 pounds is deliverable.”
USCA is concerned about the change allowing for heavier steers to be delivered putting downward pressure on the market. When hedgers “short” the market, or sell contracts they don’t own, hoping to buy them back at a discount later, cattle producers lose, said USCA Policy Analyst Jess Peterson.
“We need longs to be bullish and bring the market up. In order to have longs, we need a good delivery system. We’re concerned this change could eliminate the longs in the market and this is not to the benefit of cattle producers,” he said.
USCA has also urged the CME to establish a cattle working group consisting of representatives of the entire beef industry chain. Thus far the CME has not moved forward with that recommendation.
“We want to get everyone at the table to talk about these things and about how our markets go up and down,” said Tupper.
The most significant change in recent years regarding the CME and cattle trading has been the introduction of “auto rhythmic trading.”
“That’s why we see these big swings. The industry is usually on the sell side, the buyers are these big hedge funds,” Tupper explained.
His group would like to see the CME compile a group of experts with real knowledge of the cattle industry and how the board works, to give advice on what else needs to change so that the fundamentals of the market dictate the price, not the mood swings of the hedger or the big hedge fund.
No more changes are planned by CME at this time, although the company continuously works with customers to evaluate the hedging effectiveness of all agricultural products, not just cattle, said Tim Andriesen, CME Group Managing Director of Agricultural Products.
“We value our relationship with customers, cattle producers and the broader beef industry, and will continue to seek their feedback and engagement in our markets,” said Andriesen.
“We want to see more of a market driven by fundamentals instead of just ideals,” said Peterson.
Tupper also points out that many feeders are selling “formula” cattle that are unpriced, with no agreed-upon delivery date. These contracted cattle help the packer know what he will have to buy or not buy on the cash market. “Anytime they have the numbers in their favor they don’t have to go out and compete. It’s something that’s been lost in the shuffle. They got the upper hand and we need to make sure we can level the field,” said Tupper.
Delivery on loads of cattle doesn’t happen often, Tupper said. Usually it will happen when there is a significant spread between the “board” or the value of the protection method as compared to the cash price.