Live Cattle Contract Changes Proposed by CME

The CME Group is proposing changes in the live cattle futures contract to make it less volatile and more effective. Dave Lehman, Director of Ag Research with the CME Group says their goal is to improve the transparency in the cattle market, but in particular the cash market. So one aspect of their proposal would look at creating a contract that is settled to a cash index.
Lehman: “It has fallen to less 25 percent of the cattle transacted are negotiated and with the reminder being sold on a formula basis that doesn’t really produce price transparency. We’re looking at the contract in its entirety and if we are not comfortable that the physical delivery terms that we currently have specified are reflected of the predominately means of trading cattle in the case market then we will look at cash settlement as an alternative.”
Lehman agrees that to truly fix the problems with the lack of transparency and price discovery in the cash cattle markets the southern feedlots would need to forego their formula contracts with the packers. However, he says a cash index would provide more cash information.
Lehman: “Could we somehow use some of that data in those formulas to incorporate into a cash settlement index. So if we just look at the negotiated trade and cash settle to that then we haven’t really changed much in terms of what the underlaying basis for the futures contract. So we need to figure out the way, if there is a way, to take so of that formula information and incorporate it into the cash index.”