The CME Group’s live cattle futures contract changes may be too little too late, making it difficult for cattle owners and packers to hedge their live cattle ownership positions effectively, market analysts and traders said.
Beginning with the Oct’17 delivery month, the CME Group’s live cattle futures contract delivery specifications change to 60% choice and 40% select, a nudge toward choice of five percentage points.
However, the industry has been killing more than 70% choice since early 2015, meaning the futures contract is based on a lower-quality average than the cash market is trading.
Cash market prices, then, always should be higher than the nearby futures contract, the analysts said.
Tony Drake, senior director of Agricultural Products for the CME Group, said in a response to an emailed question that the change to the contract specifications that were announced last year was made to follow industry practices. But there were some concerns about not leading parts of the country where a 70% choice kill was not the norm.
Drake added, “We are also examining a mechanism that would potentially change this spread once a year to allow us to keep up with the market place.”
CAN’T HEDGE NOW ANYWAY
Fed cattle cannot be hedged properly now anyway, said Narciso Perez, president of Zia Agricultural Consulting. The discount in the futures market makes an effective hedge impossible.
With the exception of a bump in the Dec’17 live cattle futures contract, each month’s settlement price Monday was lower than the previous month. This discount shows the lack of confidence investors have in the cattle market over the coming months.
Many have attributed that lack of confidence in price strength to a growing US cattle herd and a rising number of fed cattle that will be coming to market in coming months. Expectations for rising volumes of competing meats also play a part in the lack of enthusiasm for prices going forward.
Futures markets are supposed to converge, or come together, with cash markets before delivery. The threat of delivery sends speculators into the market to cover their long positions before they can be delivered upon.
That allows for effective hedging, because if cash prices are around $3 per cwt or more above a soon-to-expire delivery month, cash hedgers will consider going to the trouble to deliver against the contract, Perez said.
So, the chances of a prolonged delivery period aren’t large, Perez said.
But deliveries may be forced at some point anyway, Perez said. Herd expansion is taking place at a very fast rate, and the market could become flooded with slaughter-ready cattle with nowhere else to go but into the delivery process.
Such a scenario would be extremely bearish to prices as those who don’t want the cattle scramble to get out of the way.
CASH CATTLE QUIET
No trading was reported Monday in cash cattle markets.
Cash cattle markets last week were steady to up $5 with trading at $128 to $134 per cwt in the Southern Plains and up $2.50 to $5 in Nebraska at $133 to $136.50, mostly $134. Dressed-basis trading was up $2 at $212.
Average fed cattle exchange auction prices Wednesday were $5.00 per cwt higher at $133.31, versus $128.31 a week earlier.
The USDA’s choice cutout Monday was down $1.71 per cwt at $219.91, while select was off $1.93 at $213.62. The choice/select spread widened to $6.29 from $6.07 with 55 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Friday was $133.09 per cwt, up $0.63. This compares with Monday’s Mar settlement of $132.15, down $1.22, and the Apr settlement of $133.10, down $2.47.