CME, NCBA seek changes to live futures contract

Jul 5, 2013

The times, they are a- changinĀ“. Or in this case, weights.

In the last week of June, the Chicago Mercantile Exchange Group (CME) sent a letter to the U.S. Commodity Futures Trading Commission (CFTC) requesting permission to allow heavier cattle as deliverable on the CME live futures contracts. This move comes after months of work in an effort to get more cattle available for deliveries against the futures contract.

If accepted by CTFC, cattle weighing as much as 1,550 pounds could be acceptable deliverable cattle for the August 2014 contract. According to Colin Woodall, National Cattlemen’s Beef Association (NCBA) vice president of government affairs, this maximum weight increase request is likely to be accepted.

“Overall, the steps are positive. We’re pretty happy,” he said.

While the letter is a new development, the effort to change the way CME does their live cattle futures contracts has been an ongoing process. NCBA’s live cattle committee formed a taskforce last summer to examine marketing issues like price discovery and the live futures contract.

“Where this started was from the live cattle committee of NCBA,” said Ed Greiman, an Iowa producer and current chairman of NCBA’s price discovery taskforce. He explained that NCBA combined the policy priorities of several states regarding the futures contracts and used them as a model for the NCBA priorities.

“We are asking the CME that they change the delivery specs.”

In late April of this year, NCBA issued a letter to CME requesting the live cattle future contracts be changed to include animals weighing up to 1,650 pounds and heifers. Currently, the maximum live weight for deliverable cattle on live contracts is 1,500 pounds and only steers are deliverable.

Both Greiman and Woodall said that by allowing heavier cattle, the futures market would more accurately reflect the industry.

“We’re continually seeing bigger and bigger cattle,” said Woodall.

The average weight of cattle coming into feedlots and going to slaughter has been increasing quite notably in recent years. For example, the average live slaughter weight for this week last year was 1,289 pounds. Last week’s most recent live slaughter weight was 1,300 pounds.

Another point of an increased market weight would be to open up more cattle. “By increasing the weights we increase the availability of [deliverable] cattle,” said Greiman.

This point also motivated NCBA’s late-April request that heifers be included as deliverable cattle on contracts. CME’s letter to CFTC did not include a request to change live contracts to allow heifers, but it has put together a producers’ group to review the possibility of heifers being deliverable and may request that change in the future.

“When you look at including heifers in particular, it’s making sure there are adequate deliverable cattle on the CME live futures contract,” said Woodall. He explained that as branded programs have become more popular, more and more steers have been pulled out of the pool of deliverable cattle. And as many western states ranchers are facing smaller ranges of poorer quality for, in some cases, going on three years, the supplies of cattle continue to decrease.

Greiman acknowledged the industry’s past regarding heifers, which historically have been discounted— sometimes heavily—compared to analogous steers.

The biggest concern leading to heifer discounting was the potential for hard bone and pregnancies.

Cattle found to be hard bones can only be graded C at best on the USDA maturity score, which excludes them from any of the primary quality grades (Prime, Choice and Select). This, of course, comes with significant discounting and losses.

Pregnancies in fed heifers— usually resulting from accidental exposure to bulls at too young an age—can lead to complications and gain issues, not to mention prematurely aging the heifer’s body beyond her chronological age.

Both Greiman and Woodall understood the resistance that has and might continue to exist regarding including heifers as deliverable contracts given the potential for lost value. Woodall specifically noted the concern over determining relative carcass maturity is difficult and more complex for heifers versus steers. Greiman, however, opined that the downsides were not the issues they once were.

“We don’t want the longs to have to take delivery of heiferettes or pregnant heifers, but our point in our comment to the CME was that that’s less than 1 percent. It’s very rare anymore. We think we’re past that as an industry.”

A release by the Iowa Cattlemen’s Association pointed out that fed heifers have averaged 38 percent of slaughter cattle over the past decade. The state association released the response following the late- April release of the NCBA letter to voice its support. Obviously, by broadening the range of cattle which can be delivered against a futures contract, the supply of deliverable cattle will increase.

“The biggest thing is that it’s really important to NC- BA that the CME contracts reflect the cash market,” said Greiman, speaking of the prices between steers and heifers. He pointed out that many times, heifers are on par with steers and even claim higher prices on a weighted basis. Ultimately, the goal is to bring the CME futures contracts more inline with the cash market.

Though CME did not move forward with all of NCBA’s late-April requests—increasing the maximum weight to 1,650 pounds and including heifers as deliverable—the request to CFTC to allow a maximum weight of 1,550 pounds is “a good start,” according to Woodall. — Kerry Halladay, WLJ Editor