CME may change feeder cattle index
OMAHA (DTN) – CME Group is looking to slide up the cattle weights used to compute its Feeder Cattle Index to reflect that cattle are being placed in feedlots at heavier weights.
The National Cattlemen’s Beef Association voted at its national convention earlier this month to support removing 650- to 699-pound weight range cattle and adding 850- to 899-pound cattle to the index, which essentially slides the weights higher by 49 pounds.
NCBA Chief Economist Gregg Doud said that in the ethanol era, weight placements in feedlots have climbed. It’s a 60-year-old trend that’s been reinforced lately by skyrocketing corn prices. Participants at NCBA’s convention said the current index’s calculation misses enough heavier-weight cattle to create a slight distortion in the index, which is used at the end of the month to settle CME’s Feeder Cattle futures contracts.
“The one we specifically wanted was the 850-pound cattle,” he said. “As it currently was listed, it ended at 849 and you had a whole basket of cattle we weren’t catching there at 850.”
By sliding the cattle weights up, Doud said a larger number of cattle will be used to compute the composite price. Statistically, a larger sample size results in an average that better reflects the market.
The CME takes the total dollars paid during that week and divides it by the total pounds sold to come up with the feeder cattle cash index. It’s a weighted average based on USDA cattle sales information from 12 states during the prior week. It only includes information from cattle that fit the weight specifications. The cash index released Monday was $127.40.
The last time CME changed its feeder cattle index was in 2005 to include 650- to 699-pound feeder cattle, which added to the range of contract weights (previously 700 to 849 lbs.), according to a North Dakota State University extension article written in June of 2005. The article said the changes were made to increase the number of prices included in the index, essentially expanding the sample size.
Doud said the goal of increasing the weight restrictions is to get the largest number of cattle included “to make the CME feeder cattle index the most accurate and reflective risk management tool we can make it.”
Tim Andriesen, managing director of agricultural commodity and alternative investments at CME Group, said CME spends a decent amount of time talking to its commercial participants, like those represented by NCBA, and wants to make the cash index as consistent with the physical market as possible.
“You start to hear about ideas, you start to reach out to other people around the ideas and you kind of wait until things start to gain a bit of a critical mass,” Andriesen told DTN. NCBA represents a wide cross-section of the cattle industry including packers, backgrounders, feedlots and cow-calf operators and this change has been discussed at its meetings for several years.
Now that the commercial users of the index support the change, it’s time to get input from the full range of market participants including noncommercial traders, end users, banks and others, Andriesen said. CME will put together a term sheet that includes a description of what the new specs may look like and circulate it around, gathering feedback.
“I think this is something we probably won’t find a lot of push back on,” he said. “If you think about our contracts, when you start to look at things like this that are very much about the cash utility or physical market utility of the product, the financial participants in the market are happy to make sure these things work well for the commercial participants.”
That conversation probably “wouldn’t take us more than a month,” because the change is relatively minor and reflects a general trend in the industry toward heavier animals, he said, adding that there’s no guarantee on the date. A change couldn’t be made to a contact that has any open interest, so if the CME decides to increase the cattle weights, the earliest contract it could affect is August 2012.
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