CME Changes Disregard Industry Input
AMES - The Chicago Mercantile Exchange (CME) announced recently that a $1.50 per hundredweight discount would be applied to cattle delivered to the Worthing, SD delivery point on the October 2017 cattle futures contract. Even more concerning, however, are CME’s threats to move to a cash settled live cattle futures contract if price discovery and cash negotiated trade do not increase, and increase quickly, across the major cattle feeding regions.
The Iowa Cattlemen’s Association has been vocal in their opposition to the Worthing discount and successfully advocated for changes to NCBA’s policy reflecting this stance.
“It’s upsetting that CME has gone against industry wishes and applied the discount. The discount takes place during a time when cattle in the north are typically ready to go to the packer. That’s an issue for us. Frankly, this decision feels like a mandate to our folks on how and when they can and should feed cattle for market. It’s a multi-faceted marketing disadvantage that may decrease cash negotiated trade in the upper midwest,” says Matt Deppe, ICA CEO.
In a seemingly contradictory move, CME expressed concern about lack of negotiated trade across the country and subtly threatened to move to a cash settled contract if price discovery and transparency does not increase. While Iowa and surrounding states average 60% cash negotiated trade, other major cattle feeding states, including Texas and Oklahoma, average less than 5%.
“Our problem, from a price discovery standpoint, is in the south. We have not yet, as an industry, found a way to encourage states like Texas and Oklahoma to put more cattle on the cash market,” explains Deppe.
The Iowa Cattlemen’s Association brought strong policy to the National Cattlemen’s Beef Association’s Summer Business Meeting, encouraging 50% cash negotiated trade across all major cattle feeding regions. NCBA adopted policy encouraging more cash negotiated trade.
However, the move does not seem to be enough for the CME. The December 2017 cattle futures contract is scheduled to be listed in the next 30-60 days, which leaves precious little time for the major changes in price discovery that are needed to avoid a cash settled futures contract.
ICA members do not believe a cash settled contract will solve any of the price discovery problems cattlemen are currently facing. “If we don’t have enough cash negotiated cattle, there’s no way to have an accurate cash settled contract. Price discovery is an issue that will only be made worse through a cash settled contract.
Further compounding cattlemen’s frustrations with the CME Live Cattle Futures Contract is that data on high frequency or algorithmic traders has remained inaccessible. ICA would like a third party to audit the data to determine how these traders have influenced the cattle market volatility that has taken place over the past several months.
Recent efforts by Iowa’s cattlemen to improve the cattle futures contract and delivery point system
Cattle market volatility has been a concern for Iowa cattle producers, especially since the historic drop in fed cattle prices that occurred in October of 2015. Since that time, volunteer leaders from the Iowa Cattlemen’s Association have been actively working toward solutions to the current issues in cattle marketing.
Many of those solutions became part of the National Cattlemen’s Beef Association (NCBA) official policy during the annual Summer Business Meeting. The NCBA meeting took place in Denver July 13-16. Several Iowa Cattlemen’s Association leaders attended the meeting including Brad Kooima of Rock Valley, Mike Cline of Elgin, David Trowbridge of Tabor, Justine Rowe of Dallas Center, Ben Novak of Elberon and Ed Greiman of Garner.
One of the priorities for Iowa cattle producers was strengthening support for the Worthing, South Dakota delivery point. Amendments to NCBA’s policy now include broader support for the delivery point process, including opposition to “any changes by the CME group that would adversely affect cattle feeders’ ability to deliver on Live Cattle contracts including, but not limited to, the discounting of deliveries to any delivery point.” The same policy, passed by the Cattle Marketing and International Trade (CMIT) committee, includes the resolution to “encourage and support the existence of numerous well-designed and efficient physical delivery points to which cattle may be delivered.”
Increasing price discovery in all major cattle feeding regions was another priority for Iowa Cattlemen’s Association members. The NCBA CMIT committee passed a resolution to “pursue market-driven initiatives that encourage and increase negotiated cash trade in all major cattle feeding regions.”
CME’s announcement regarding Worthing and threat to move to a cash-settled contract stand in clear opposition to industry input. “The Iowa Cattlemen’s Association whole-heartedly believes that producers should have options when it comes to marketing their cattle. That said, it’s disheartening that we have yet to see all market participants understand that each non-cash negotiated trade is reliant on true price discovery and cash negotiated trade for its foundation,” says Deppe. “Increasing confidence in cattle market price discovery will take full industry participation, not just among the producers in our state, but among producers all the way across the feeding sector in the US Beef Belt. Solutions are working forward, but the question is whether the pace and frequency of cash offerings will be enough in the south.”
About the Iowa Cattlemen's Association: The Iowa Cattlemen’s Association represents nearly 10,000 beef-producing families and associated companies dedicated to the future of Iowa’s beef industry. ICA’s mission is “Grow Iowa’s beef business through advocacy, leadership and education.”