The CME Group is reviewing the live cattle futures contract traded at the Chicago Mercantile Exchange in an effort to keep it relevant to the cash market.
As part of a panel addressing the live cattle contract’s applicability to the cash fed cattle market, CME Group Executive Director of Ag Markets Fred Seamon spoke Friday at the Agricultural Commodity Futures Conference in Overland Park, Kansas.
The live cattle contract is old, Seamon said. It was launched Nov. 30, 1964, and in the intervening time, the underlying cash market has changed.
The CME Group organized a commercial-oriented review of the market with no speculators where CME officials made telephone calls to the individuals in the group before calling them all in to the CME for a meeting, possibly in May or June, he said.
No part of the contract appeared to be off limits for possible changes. Seamon said it was hard to tell what would come of the deep dive, but he said something may be done about the quality grade of deliverable cattle.
Fed cattle quality has improved over time with the industry turning out more choice and prime carcasses than it was 40 or 50 years ago, he said. Heifer weights also could be an issue that is addressed, as well as other issues like the October discount for northwest Iowa/southeast South Dakota delivery and feedlot delivery.
At some point, the CME Group intends to survey market participants about the focus group’s comments, Seamon said.
CFTC WEIGHS IN
Open interest data over the last 10 years shows the live cattle futures contract continues to work well and may only need “a little tweaking” to make it better, said the CFTC’s Acting Deputy Director of the Division of Market Oversight Rahul Varma.
Live cattle open interest has remained relatively stable over the last 10 years, Varma said. Additionally, the ratio of open interest held by commercials has remained “remarkably stable” with about 52% short and 37% long.
That indicated there were no structural changes in commercials’ use of the futures market, he said.
CATTLE FEEDER PERSPECTIVE
Billy Schmitz, head analyst for Five Rivers Cattle Feeding, told the group that one issue worth examining in the live cattle contract was weight limits. The current contract excludes a large portion of the total fed cattle supply because of the limits, especially those of heifers, which exceed the weight limit more often than steers.
During the discussions, the possibility of variable contract specifications was brought up, but Schmitz said such a concept does not eliminate the basis risk inherent in futures trading and it would lead to uncertainty.
Schmitz added that dairy influence in the feeding system was a small percent of the whole, and they are not overwhelming the system.
Schmitz hinted that a look at daily limits may be in order. With feeding costs up, interest rates mean a lot in terms of large daily limits, he said.
US CATTLEMEN WANT PRICE DISCOVERY
Next to speak Friday was Justin Tupper, president of the US Cattlemen’s Association. He focused on price discovery for fed cattle, saying it was very important to cattlemen but was getting lost.
While daily bids and offers may be going away, small feeders needed to see sample packer/feeder contracts for their area, Tupper said, and they’re not available.
The live cattle contract doesn’t function like the market does, Tupper said. For instance, trades of 40,000 pounds are not done – they trade by the load.
RESEARCH ANALYST: IT’S WORKING
Chief Research & Analytics Officer for Terrain Don Close said he thought the contract was “working quite well.” There have been no big market plays or disruptions.
Close said volatility will be the big issue going forward. What’s more, it will be an issue for some time, making it challenging to keep up with margin calls and lines of credit.