CME Wants to Lower Its Speculative Limits

The Chicago Mercantile Exchange (CME) has proposed reducing the speculative limits on the live cattle contract from 600 to 300 during the contract month.  The proposal is subject to approval by the Commodity Futures Trading Commission (CFTC).  The CFTC published a notice in the Federal Register on Oct. 30 soliciting comments.  The closing date on the comments was Nov. 14.

The Federal Register notice quotes the CME petition that the proposed level of 300 contracts is “more in balance with deliverable supplies” for the live cattle futures contract. 

Further, deliverable supplies of live cattle meeting the futures contract’s existing weight specifications have been adversely impacted by the “significant increase in slaughter weights of cattle in the U.S.”  As a result, “a growing proportion of the U.S. fed steer population is rapidly becoming ineligible for delivery against the Live Cattle contract.”

With carcass weights increasing yearly, there are fewer cattle that can meet the contract specifications.  The current contract limits call for a 1,300 pound average with the largest animal weighing 1,350 pounds.

Year to date, steer carcass weights are 821 pounds on average, up 30 pounds over a year ago, according to Cattle-Fax. 

The CFTC by law is required to oversee appropriate speculative limits to prevent market manipulation and to protect market participants.  The CFTC monitors futures contracts to ensure that speculative limits are set at appropriate levels relative to the deliverable supply of the commodity.  An imbalance between speculative limits and deliverable supply will lead to a situation where the contract is not reliable as a risk management tool.  That can create a climate where manipulation and price distortions could occur.

NCBA commented in support of the proposal by the CME to decrease the speculative limit from 600 to 300

contracts during the delivery month.  NCBA opposed the CME’s 1997 proposal to increase the contract level to 600.  NCBA’s comments are available at hill.beef.org.