NCBA’s Recommended Change to CME Feeder Index Reflects Realities
WASHINGTON – On Feb. 22, 2011, the National Cattlemen’s Beef Association (NCBA) issued a letter to the Chicago Mercantile Exchange Group’s (CME) Commodity Research and Product Development Department to affirm a NCBA policy change relating to the weight specifications of the CME’s feeder cattle futures contract. In order to improve the capability of the CME feeder cattle futures contract as a risk management tool relating to cattle placements in feedlots, NCBA President Bill Donald said NCBA supports the removal of the 650-699 pound category from the calculation of the CME Feeder Cattle Futures Index. Donald said the inclusion of an 850-899 pound feeder cattle category makes sense given the current reality of the marketplace.
“With record grain prices, more cattle are remaining on forage for as long as possible before going to the feedlot,” Donald said. “The realities of the marketplace vary year to year and as a producer, I respond to those changes. The intent is to adjust the index in order to more accurately reflect the realities of the marketplace. We need the CME Feeder Cattle Futures Index to adjust as well in order to serve as a viable risk management tool.”
According to a CME representative, an adjustment to the index would not be unprecedented. The cash-settled contract has had various changes in weight ranges throughout the last 25 years including the following: 600-800 pounds from 1986-1992; 700-799 from 1993-1999; 700-849 from 2000-2005; and 650-849 since June 2005. The index is designed to reflect changes in the marketplace.
Donald, who is a Montana rancher, said that unsubstantiated claims that the modification to the index would break the feeder cattle market and cause direct financial harm to cattle producers who market feeder cattle are “bizarre.” Insinuating that the removal of the 650-699 pound category would transfer “millions or even billions” of dollars away from feeder cattle producers to packers and their cattle feeding operations is careless and inaccurate, according to Donald.
“It looks to me like a little education is needed. NCBA’s intent has been maliciously misinterpreted. For roughly 25 years, this has been a cash-settled index based on a series of different weights created from a composite of cash transactions that have already taken place. Our members recommended a change through our grassroots policy process that started at the state level and was ultimately approved during NCBA’s annual convention. The index does not change the price cattle are traded at, but rather provides a reliable risk management tool for cattlemen to use. The lighter weight calves being dropped from the index should now trade at a stronger basis.”
NCBA Vice President J.D. Alexander, owner of an independent feedlot in Pilger, Neb., knows firsthand that most cattle aren’t entering the feedlots until they reach the 800 pounds or more.
“I have not placed a steer in my feedlot under 800 pounds for five years,” said Alexander. “It is no different than changing the specifications on live cattle contracts to reflect the current actual weights being sold, which is around 1,400 pounds. This doesn’t affect the profitability of packers or feedlots and isn’t going to negatively impact cow-calf producers. It simply reflects realities, which translates into improved accuracy when managing risk for all of us in the industry.”