CME Group, the world's leading and most diverse derivatives marketplace, announced August 5 a series of changes to address cattle market volatility. The new measures are a result of continued collaboration with and feedback from the cattle industry, as well as the results from an independent study conducted by Informa Economics, 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 NCBA 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."  

Based on extensive customer feedback, internal review and Informa's independent research, CME Group will add a seasonal discount of $1.50/cwt. on live cattle tendered to its Worthing, South Dakota delivery location for the October contract only. The new discount will be effective with the October 2017 contract, which will be listed for trading on Monday, August 22, 2016, pending review by the U.S. Commodity Futures Trading Commission (CFTC).

“The extensive research supporting this decision concluded that this discount would better align delivery values with cash market prices and maintain compliance with CFTC's policy on location price differentials, while resulting in little or no impact on local cash cattle prices,” CME said.

The Iowa Cattlemen’s Association (ICA) 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,” said Matt Deppe, ICA chief executive officer.

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

CME applauded 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% of cattle sales are negotiated in cash markets across the U.S. today with less than 5% 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. 

Cattle industry efforts

At National Cattlemen’s Beef Association’s (NCBA) conference in January, CME executive chairman and president Terry Duffy met with cattlemen to discuss cattle market performance. From there, the two groups established a working group.

Messaging, which occurs when a buyer or seller enters a new order, modifies an existing order, or cancels an existing order on the CME electronic trading platform, was the first item addressed as cattle contracts didn’t have a cap on the number of messages that any one firm could make in a single day.

On Feb. 1, less than a week after NCBA’s conference, CME added livestock products to its messaging efficiency program (MEP), which implemented a cap on the number of messages that could occur per fill. The MEP is designed to ensure efficient messaging – that someone doesn’t continually enter orders, modifications and cancellations without trading.

After the cap was implemented, CME reported that between January and April, the ratio of messages to orders filled in the Live Cattle futures market decreased by 15%, while overall volume was relatively unchanged.

NCBA’s vice president of government affairs Colin Woodall recently told Feedstuffs for about six weeks after the cap was implemented the markets calmed down, but added that the volatility has since returned.

CME also reduced livestock futures and options trading hours to align with the period of greatest liquidity in the markets – roughly 87% of trades occurred between the 8:30 a.m. and 1:05 p.m. CT timeframe during 2015. Additionally, CME began offering June 6 an additional pre-open period for customers to enter, cancel and modify livestock futures and options orders on CME Globex from 2:30-4:00 p.m. CT Monday to Friday.

Woodall said the changes hadn’t really made any significant impact.

“This was a major discussion point of NCBA’s recent summer business meeting,” he said.

The Iowa Cattlemen’s Association brought strong policy to the meeting, encouraging 50% cash negotiated trade across all major cattle feeding regions. NCBA adopted at the meeting policy encouraging more cash negotiated trade.

However, ICA said 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, the group added.

“ICA members do not believe a cash settled contract will solve any of the price discovery problems cattlemen are currently facing,” the group stated. “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.

CME’s changes stand in clear opposition to industry input, ICA said.

“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,” said 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.”

While the latest set of CME changes may help improve the markets further, the next hurdle for NCBA is getting the information about who’s in the marketplace. Woodall said NCBA asked CME Group for the data, but due to legal reasons, they are unable to provide the information.

Woodall said NCBA’s next step is working with the U.S. Commodity Futures Trading Commission to get that information to be able to get the categories of active participants in the marketplace.

“Any further action NCBA will rely on knowing who is in the marketplace so the process is currently stalled,” he explained.