Call the Market

On the afternoon of Sept. 9, an email from the Chicago Mercantile Exchange (CME) pinged my inbox regarding the daily limits of both the live cattle and feeder cattle contracts. The email explained that, pending the Commodity Futures Trading Commission's (CFTC) approval, both the live cattle and feeder cattle contracts would see their daily limits decreased. This would take effect on Oct. 25 this fall.

Currently, live cattle contracts have a daily trading limit of $7.50, with an expanded limit of $11.25. The new decreased daily limit would allow the live cattle contracts to have a daily limit of $6.50, with an expanded limit of $9.75.

Currently, feeder cattle contracts have a daily limit of $9.25, with an expanded limit of $13.75. The new decreased daily limit would allow the feeder cattle complex to have a daily limit of $8.25, with an expanded limit of $12.25.

To cattlemen who are dealing with late-summer/early fall pressures, this may seem like an arbitrary email that the higher-ups in Chicago busied themselves with.

However, please take the time to understand what this means because the changes are substantial -- and could help protect your market from some unnecessary price swings.

In July, I attended the United States Cattlemen's Association Cattle Producers Forum meeting in Billings, Montana where I sat in on a panel with the CME working group regarding the market and its functions.

When it came to asking the panel questions, I specifically asked them how they determined what the new daily limits for the year were going to be. I added that it was a concern to me that, year after year, the market was being allowed to trade in wider limits which inarguably welcomes more speculative day trading and greater market volatility. In short, the CME representative told me that they determine the market's daily limits based on a percentage of the market's trading range throughout the year. The market's daily limit has currently been allowed to increase 4.25% (meaning that the daily limits have been expanded to 4.25%), but the new daily limits would reduce that threshold from 4.25% to 3.5%.

Price discovery is important in any market. My concern, as I see the complex allowed to trade in wider ranges year after year, is: Who is the daily limit expansion really benefiting? Cattlemen or traders? Because just remember, daily limits mean that the live cattle contracts can trade $7.50 (current daily limit) higher, or $7.50 lower on any given day. And cattlemen know that the market takes its sweet time inching higher, but when pressure builds and it's time to trade lower, dollars can be lost within a blink of an eye.

I personally believe that reducing the daily limits from an expansion of 4.25% to 3.5% is a positive thing for cattlemen; theoretically, it should help curb some of the volatile market swings that happen in the cattle complex for no apparent reason. The futures complex is supposed to help producers mitigate and manage risk, not be the platform where wide daily price limits allow for rich and unpredictable speculative day trading.

Read CME's full announcement here: https://www.cmegroup.com/…

ShayLe Stewart can be reached at shayle.stewart@dtn.com

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