CME reverses course on addressing cattle market volatility

Recently, the CME issued an advisory notice to the marketplace that stated three delivery points would not renew their participation on the Live Cattle Futures Contract: North Platte, Nebraska; Columbus, Nebraska, and Pratt, Kansas. We understand that participating in the delivery mechanism on the contract places an onus on the stockyard and we respect any individual stockyard’s decision to participate in the contract, but a reduction in delivery capacity on the Live Cattle futures contract is unacceptable.

The discontinuation of those delivery locations directly follows a year where the United States Cattlemen’s Association worked diligently with CME and the Commodity Futures Trading Commission to address cattle marketplace volatility by adding delivery locations to the contract. The withdrawal of North Platte, Columbus and Pratt from the contract amounts to an estimated 10 percent immediate reduction in the weekly deliverable supply capacity, according to the CFTC’s rules and regulations.

The annual approval process was a key feature of the 2017 contract changes that was meant to ensure financial soundness and physical infrastructure of participating yards was sufficient to ensure the health and safety of the cattle, the yard crew and the USDA graders. It was also the direct result of CME’s neglect of the physical delivery infrastructure that manifested in the removal of the yard at Norfolk, Nebraska, nearly four months after it went out of business. The annual renewal process was not meant for CME to passively watch the delivery capacity dwindle on the contract.

Annual applications to the CME for renewal of regularity are due prior to January 1, so the Exchange had at least one month to anticipate and address any reductions or withdrawals of regularity on the contract. This is particularly egregious given that our letter to the CME offered eight suggested delivery locations, of which the CME successfully added three of those recommendations to the contract: Kearney, Nebraska; Lexington, Nebraska; and West Point, Nebraska. Even though the typical review process is one month, the application for regularity from Dunlap, Iowa has been languishing for the last nine months despite the fact that it is a well-operated and staffed facility that meets all the requirements for regularity.

We need these delivery locations to be available on the contract whether or not they regularly receive deliveries on the Live Cattle contract. In a properly functioning market, the ability to make and take delivery on the contract is critical to keeping the futures market in line with the cash market.

The lack of stakeholder engagement and failure to move swiftly to address the reduction in capacity is not only ill-advised from a market integrity perspective, it’s bad business. Should we continue on this path, the futures board will certainly revert back to the irregular volatility that brought us to this point, which undermined confidence in the market. Since CME made changes to the contract and improved the delivery procedures, volume has been up; open interest is up. The Live Cattle Futures Contract is and can continue to be a profitable venture for the CME Group—but they need to keep on moving towards that goal, part of which is incentivizing sale barns to participate on the contract as approved delivery locations.

In a hearing before the Senate Agriculture Committee, Joe Goggins, on behalf of USCA, requested that “the Committee work with the CFTC and relevant market participants to ensure disruptive trading practices are prohibited so as to not compromise the foundation and role of the futures market as a risk management tool for cattle producers.”

We commend U.S. Senate Agriculture Committee Chairman Pat Roberts and Ranking Member Debbie Stabenow for continuing that dialogue­—most recently, the Committee hosted a hearing with CFTC Chairman J. Christopher Giancarlo. We were encouraged by statements made during the hearing by both the Chairman and Senators that showed a strong interest and awareness of the need for properly functioning contracts, especially in the livestock industry. In particular, we applaud Chairman Giancarlo’s statement that “it’s vitally important for the [CFTC] to keep an eye on how contracts, especially in agricultural markets, are working to let those that operate those contracts at the Exchange know their responsibilities to keep these contracts fresh and updated….because they need to serve our ag users.”

Despite that message from the CFTC, the CME remains unmotivated to finish the work they started and address the volatility concerns that plague the cattle marketplace. The futures board has always been a tool for cattle producers to mitigate risk, but the ongoing uncertainty associated with the CME’s administration of the Live Cattle Futures Contract will deter members of the cattle industry from using these markets. This will prove most consequential for young and beginning farmers and ranchers, who borrow the majority of their operating funds from the banks. Without confidence in the ability to hedge risk in a volatile futures market, producers will not be able to secure operating loans from lenders.

Ensuring that the fundamentals of the cattle market are working properly is a basic tenet that the industry needs to work towards in 2018.

—Kenny Graner, United States Cattlement’s Association