CME contract changes

 

Carrie Stadheim, The Fence Post

September 3, 2019

 

The Chicago Mercantile Exchange has announced changes in their standards for cattle contracts. The United States Cattlemen’s Association sees value in the first change but is concerned with the second.

 

According to the USCA Region X Director Justin Tupper, his organization’s goal is to improve the environment for those rare occasions when delivery occurs on a cattle contract.

 

“We are trying to make sure we are delivering a product equal to the industry standard,” said the manager of St. Onge Livestock in St. Onge, S.D. The delivery process is “extremely complex,” with a lot of moving parts, he said.

 

“We needed new specifications because deliveries are very difficult today. We want to get more in line with what a real load of cattle would consist of.” He believes the first change accomplishes this because more and more cattle are grading choice.

 

Specifically, the CME plans to make the following changes on Sept. 9:

 

1. Implement a new par quality grade of delivered cattle of 70% choice, 30% select steers or heifers (the “New Grade”) of the Live Cattle Futures contract commencing with the February 2021 contract month and beyond;

 

2. Update the delivery weights for live-delivered steers to allow for delivery of animals up to 1,600 pounds of the Live Cattle Futures contract commencing with the February 2021 contract month and beyond. Delivery remains at par between 1,050 up to 1,500 pounds. Steers weighing more than 1,500 pounds but less than or equal to 1,575 pounds shall be deliverable at an adjustment equal to the 900-1,000 pounds factor from the USDA LM_CT155. Steers weighing more than 1,575 pounds but less than or equal to 1,600 pounds shall be deliverable at an adjustment equal to the 1,000-1,050 pounds factor from the USDA LM_CT155; and

 

3. delay the listing of the February 2021 contract month of the contracts until the effective date of this submission, Monday, Sept. 9, 2019 (collectively, the “Rule Amendments.”

 

The first change will help increase demand for higher quality cattle, Tupper believes, as it is a change from the current par quality grade of 65 percent choice, 30 percent select.

 

The CME said the first change is intended to more closely align the standard with the average quality of cattle being transacted.

 

The second change increases the upper limit for live delivery of steers by 50 pounds.

 

The CME explained, “we are updating the delivery weights for live-delivered steers to allow for delivery of animals up to 1,600 pounds of the Live Cattle Futures contract commencing with the February 2021 contract month and beyond. Delivery remains at par between 1,050 up to 1,500 pounds. Steers weighing more than 1,500 pounds but less than or equal to 1,575 pounds shall be deliverable at an adjustment equal to the 900-1,000 pounds factor from the USDA LM_CT169. Steers weighing more than 1,575 pounds but less than or equal to 1,600 pounds shall be deliverable at an adjustment equal to the 1,000-1,050 pounds factor from the USDA LM_CT169. Currently, no steer weighing more than 1,550 pounds is deliverable.”

 

USCA is concerned about the change allowing for heavier steers to be delivered putting downward pressure on the market. When hedgers “short” the market, or sell contracts they don’t own, hoping to buy them back at a discount later, cattle producers lose, said USCA Policy Analyst Jess Peterson.

 

“We need longs to be bullish and bring the market up. In order to have longs, we need a good delivery system. We’re concerned this change could eliminate the longs in the market and this is not to the benefit of cattle producers,” he said.

 

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