Changes to feeder index implemented

Cattle Market & Farm Reports, Editorials
Jun 20, 2007
by WLJ
13, 2005

— $3-plus jump noted.
— Market demand also better.
A significant jump in the primary indicator for feeder cattle price trends at the beginning of the month caught the attention of both market analysts and cash market participants alike. The reason behind that jump, however, was a combination of market indicators and a change in mathematical formulas and not just an increase in demand for feedlot-ready cattle.
The Chicago Mercantile Exchange feeder cattle index on June 3 was $114.37 per cwt, a $3.29 jump compared to the previous day. That was called the largest jump in that figure in the history of the feeder index calculations.
While there were indications from auction barns that demand and prices for feeder cattle were both stronger late that week, a change in the index’s formula added more to that increase, analysts said.
Beginning June 2, the CME feeder index started utilizing prices from 600-850 pound steers, compared to the previous range of 700-850 pounds. Adding lighter-weight cattle to the formula raised the index’s average price because prices for those cattle are naturally higher than their heavier-weight counterparts.
“The formula changed to include a much wider price range, with all of the addition coming on the top side,” said Lance Zuhrmann, M&Z Livestock Analytics. “That skewed the index quite a bit on the first day.”
Another change to the formula included widening the class of cattle to medium and large 1s and 2s, compared to just medium and large 1s previously.
The formula will still be based on the price of cattle sold in the 12 primary feeder cattle states, mostly Plains and southern states that have over 100 auctions reporting.
However, market analysts also said that the tremendous jump in prices was indicative of an increase in both demand and prices paid for cattle during the first few days of June.
“Particularly in some northern states we’ve seen a lot of graze-out wheat cattle hitting the market and they’re are in demand by feedlots,” said Randy Blach, lead economist with Cattle-Fax. “We’re also seeing a lot of grazing optimism and that is leading to increased interest in cattle that could still go to pasture the rest of this spring and summer. It wasn’t just the change in formula that jumped cattle prices, but also an improvement in the market itself.”
Other market sources added that day-to-day price fluctuations in the CME index could be much wider in the future than they were under the old formulation because there are a lot more $3-5-and-larger price changes in lighter weight cattle than there are in the heaviest weight of feedlot placements.
The new formulation will be used to close out hedges on feeder cattle futures contracts starting with August. — Steven D. Vetter, WLJ Editor


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