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 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 says the lean hog contract is settled to a cash index and has been very successful. He refutes producer concerns that a live cattle contract settled to a cash index would give leverage to high frequency traders and speculative accounts that don’t have to take delivery.
As part of the contract changes the CME is also adding a seasonal discount of $1.50/cwt on deliveries tendered to Worthing, SD for October, to facilitate a more orderly delivery process. They’ve also stopped issuing live cattle contracts past October 2017 until they have resolved the issue.
