CME Group to discount Worthing futures contract

By Stephen Davies

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, Aug. 5, 2016 - Bucking local opposition, CME Group Inc. will add a seasonal discount of $1.50 per hundredweight on live cattle tendered to its Worthing, S.D., delivery point for the October 2017 live cattle futures contract.

The extensive research supporting this decision concluded that this discount would better align delivery values with cash market prices and maintain compliance with (the Commodity Futures Trading Commission's) policy on location price differentials, while resulting in little or no impact on local cash cattle prices,” the company said in a news release issued today.

Since CME announced it was studying the discount idea in February, livestock producers in South Dakota expressed their displeasure.

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That didn't change with the latest announcement. South Dakota Cattlemen's Association President Todd Wilkinson said his group is “extremely disappointed.”

“Our region has the highest percentage of negotiated trade of any other major cattle feeding region and we fear the CME proposal may further jeopardize an already tenuous cash market,” Wilkinson said. “Further, the CME proposal unjustly penalizes a growing cattle feeding area without similar examinations of whether seasonal adjustments are needed at other delivery points.”

The new discount will be effective with the October 2017 contract, which will be listed for trading on Monday, Aug. 22, pending CFTC review, CME said.

“We greatly value our relationship with the cattle community and are committed to helping producers and commercial firms manage their price risk,” said Tim Andriesen, CME Group Managing Director of Agricultural Products. “Since the start of the year, we have been working with the (National Cattlemen's Beef Association) and the broader industry to enhance our cattle futures markets. While we are announcing these changes and will continue our ongoing work with the industry, we have concerns about the lack of transparency of cash cattle markets.”

Since it opened in August 2009, the Worthing delivery point has been the destination for just over half of all deliveries tendered. Of the remaining 12 delivery points, Norfolk, Neb., with about 15 percent of deliveries, is the second most popular.

An analysis performed by Informa Economics for CME said the the discount “would shift the delivery burden away from areas that have a high percentage of uncommitted cattle to areas that have a lower percentage. Thus, it is reasonable to conclude that practical deliverable supply would decrease to some degree in October if the discount on Worthing is enacted.”

But whether this change “would be large enough to have a material impact on basis levels or basis variability is difficult to discern prior to the implementation of the discount,” Informa said.

As for cash price, Informa said the change will likely result in a wash.

“If we use the average number of delivery cattle tendered to Worthing, (5,000 head) and assume that Norfolk and Columbus (Nebraska) will attract half of those, this leaves about 2,500 head more that will move through the local cash market,” Informa said.

“Theoretically, larger cash market supplies should translate to a lower price, all else equal,” Informa said. “However, it is also reasonable to expect packer demand for cattle in the region to increase, since packers in the area will be procuring fewer cattle via the futures delivery process and thus will have to look to the negotiated market to make up the difference.

“Increased packer demand for cattle should theoretically raise the cash price,” Informa said. “Net, net these two effects should be largely offsetting and thus it is reasonable to expect little or no material impact on negotiated cash prices” in the Iowa/Minnesota region. “Even if the supply effect dominated the demand effect, the resulting price decline would probably be very small given the relatively small number of cattle affected.”

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CME also announced two other changes. From the news release:

Revised grading and quality specifications - Based on industry feedback and increasing quality grades seen in all major fed cattle regions, CME Group will update par quality grades for both live and carcass-graded deliveries to 60 percent choice and 40 percent select, from 55 percent and 45 percent respectively. Pending regulatory reviews, these changes will be effective with the October 2017 contract month.

Delayed listing of additional contracts - CME Group applauds the efforts of the industry to create additional market transparency, particularly through efforts like the recently introduced cash cattle auctions. Transparent, negotiated or auction-based cash markets are a prerequisite for effective futures markets, particularly those with physical delivery. However, only approximately 20 percent of cattle sales are negotiated in cash markets across the U.S. today with less than five percent in major producing states like Texas and Oklahoma. As a result, CME Group will delay listing any additional contract months beyond October 2017 as we continue working with the industry to evaluate ways to improve cash market transparency, review cash market developments and consider the introduction of cash-settled products if transparency does not improve. 

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