Feb 19, 2010
by WLJ

An open letter to the chairman of the Chicago Mercantile Exchange

February 8, 2010

Mr. Terrence A. Duffy CME Executive Chairman Chicago Mercantile Exchange 30 S. Wacker Drive

4th Floor, South Tower Chicago, IL 60606

Dear Chairman Duffy:

On November 19, 2009, we wrote to you regarding widely held concerns that the inclusion of Worthing, South Dakota, as a par delivery point for the CME Live Cattle Futures Contract, without appropriate discounts, “created the risk of your contract becoming nothing more than a dumping ground for overweight and undesirable cattle.” At that time, we pointed out calves, and breeding stock. Accordingly, Merc policymaking should be expected to mature along with its influence. B.) The fall period, centering around the that for the month of October, the Sioux Falls-Worthing fed cattle market had averaged 4.34 cents per pound discount to Texas over the five years ending 2008, only to trade at a mind-numbing 6.82 cent discount in October 2009. We then asked how any responsible organization, let alone a leading proponent of the efficiency of free markets, could even consider including such an everyday low price discount center at par. After all, Worthing’s inclusion, without appropriate discounts, is totally at odds with officially reported USDA price data for each and every past year. With your background as an experienced livestock trader, you recognized the possible severity of this situation and promised to give it your personal attention.

In the meantime, a vocal group of short hedgers, seeking to preserve the windfall advantage they enjoyed last fall, has preempted CME reviews of the need for discounts at Worthing. Your staff has facilitated their efforts through the selection of industry advisory groups comprised of 90 percent short hedgers. The biased composition of these committees constitutes a fundamental violation of due process, in that these people in no way represent the broader interest of the cattle industry. After all, hedged cattle represent only 6 to 9 percent of the cattle inventory of this country. As we shall see, the interests of this small minority, clearly in this case, are in absolute conflict with those of the vast majority of our industry.

Rather than being mislead by selfish interests, Mr. Chairman, the Exchange must evaluate these issues in their broader economic context, to wit: A.)

The influence of CME futures on the pricing of all cattle in our country has grown immeasurably since trading began in 1964. The action on the Merc now impacts the value of all fed cattle, feeder cattle, stocker month of October, is particularly critical for the nation’s cow/calf industry.

Due to the seasonality of calving, ranchers market a large share of their year’s production during this time frame. Given these considerations, we certainly shouldn’t risk a repeat of the debacle described below.

Mr. Chairman, the following is an absolutely verifiable account of the events that occurred in the nation’s cattle markets in the fall of 2009:

Thousands of virtually unmerchantable, overfat steers, which major packers had refused to buy at any price, were dumped on the CME futures contract, setting off … a violent chain reaction which destabilized the entire cattle market, lowering the price of all fed cattle, feeder cattle, and calves by some 5 cents per pound in the process. (See charts).

Mr. Chairman, there can be no doubt that this train robbery cost the nation’s cow/calf industry, all unhedged cattle feeders, and stocker operators millions upon millions of dollars. Many of the hedgers who were short the October futures benefitted doubly by buying feeder replacements from producers for 5 percent less than they would have paid otherwise. Unhedged cattlemen deserve better than this; they have enough problems already. When one considers that the total value of the nation’s cattle inventory is approximately ninety-two b i l l i o n d o l l a r s ($92,000,000,000), it is readily apparent that these matters are far from trivial. The Merc cannot allow its practices to damage the value of such a large, vitally important, asset class.

Thank you for your consideration. We would very much appreciate a written response to our concerns from your staff.

Sincerely, Charles D. McVean Chairman, McVean Trading & Investments, LLC