GIVEN the extended federal government shutdown, CME Group announced a change in the procedures for final settlement of the October lean hog futures and options contracts.
Since Oct. 11 and Oct. 14 price data from the U.S. Department of Agriculture were not available by the Oct. 15 settlement date, the exchange based final settlement prices on the volume-weighted average price of the contract for the Oct. 11 and Oct. 14 trading days. The process included both floor-based and Globex-based trading activity during regular trading hours and led to a final settlement price of $90.62.
According to University of Illinois agricultural economist Paul Peterson, such action — changing the rules in the middle of the game, as he put it — is taken only in true emergency situations and occurs very rarely.
"Before this, the most recent previous emergency in the livestock contracts was in December 2003, in connection with the (bovine spongiform encephalopathy) discovery," he said. "In that case, the December 2003 live cattle futures contract was just a few days away from expiration, and the collapse in cash prices caused futures prices to lock limit down. Daily price limits were expanded so that futures prices could resume trading and allow traders to liquidate their positions before trading ended."
CME dairy futures and options products are also cash-settled contracts, but federal milk marketing orders were still published during the shutdown, and contracts were settled as scheduled.
With USDA back up and running, the market got its first look at the agency's cash hog pricing and slaughter data. Eastern Corn Belt base prices averaged $89.51 last Thursday, more or less steady with pre-shutdown prices; the western Corn Belt average was $91.16, off a little more than a dollar from the beginning of the month.
USDA estimated both Wednesday and Thursday hog slaughter at 433,000 head, steady with last year. The cutout as of last Thursday, however, was much weaker, with loin prices of $99.49 coming in roughly $5/cwt. off pre-shutdown prices.
"Based on the new cutout, Dow Jones estimated Thursday's packer margin index at plus $3.28 per head versus plus $19.02 on Sept. 30," Farm Progress analyst John Otte said. "More weakness in wholesale pork cutout values than in weighted-average cash hogs prices while the government was shut down is not good news for the hog trade."
Indeed, futures prices slipped last Thursday, with December settling at $88.45 and February settling slightly above $90.