CME Making Livestock Changes

Cattle, Hog Markets to Allow Post-Close/Pre-Open Order Entries

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Scott Brown, an agricultural economics professor at the University of Missouri, included this chart in testimony Tuesday before a House Agriculture Subcommittee to highlight weekly feeder cattle prices and the sharp decline that began during the latter part of 2015. (Chart courtesy of Scott Brown)

OMAHA (DTN) -- CME Group will begin offering a post-close/pre-open state for cattle and hog markets to allow order entries for the next trading day, the exchange announced Tuesday.

Starting June 6, the post-close/pre-open state will apply to futures and options for lean hogs, feeder cattle and live cattle contracts. The window to place orders in the post-close/pre-open state will run from 2:30 p.m. Central Time to 4 p.m. CT.

CME noted the post-close/pre-open state will allow for placing orders, modifications and cancellations for good-til-canceled (GTC) orders and good-til-date (GTD) orders. CME Group stated that "no matching takes place" during the post-close/pre-open time frame "and it should not be considered an extension of the current day's trading session."

John Harrington, DTN's senior livestock analyst, noted traders often make standing orders at a specific price either above or below current levels. Such orders can be either good-til-canceled or good-til-date.

A good-til-canceled order remains in the market indefinitely -- until it either gets filled or canceled. The good-til-date order sits in the market until it gets filled, canceled or the specified date expires.

Harrington noted, "As I understand it, this change would allow traders to change these standing orders (modify or cancel) after trading hours. This could come in handy when some surprising news develops after trading hours (e.g., a shocking on-feed report). If the news significantly changes the expectations, he will have the ability to modify these standing orders prior to the reopening of business the next day."

Harrington added that the post-close/pre-open state also might be seen as a method to reduce extreme price volatility.

The CME move comes as Congress and the Obama administration are looking at livestock markets from a variety of angles. For instance, The House and Senate Agriculture Committees have somewhat dueling hearings this week on the state of the livestock industry. The House Agriculture Subcommittee on Livestock and Foreign Agriculture was out of the gate first with a hearing Tuesday morning.

Tracy Brunner, president of the National Cattlemen's Beef Association, told lawmakers there was no need for government action in cattle markets. In fact, NCBA and CME are looking at potential changes to help ensure the futures market works for producers.

"Today we ask for no direct action from our government in our cattle marketing systems and forums," Brunner, a rancher and cattle feeder from Kansas, told House aggies. "The cattle industry relies on the transparency of price discovery to send clear signals up and down the beef supply chain. We have recognized the volatility in the cattle futures market, and we are working directly with the CME Group to find ways to address it."

Brunner instead told lawmakers he was more concerned that Agriculture Secretary Tom Vilsack is considering bringing back a livestock marketing rule that NCBA opposed earlier in the administration. NCBA and groups such as the National Pork Producers Council have argued that the controversial rule by the Grain Inspection Packers and Stockyards Administration (GIPSA) would hurt the ability for producers to sign marketing contracts with packers.

In the same hearing, David Anderson, economist at the Texas A&M Agricultural and Food Policy Center, said producers increasingly have questions about volatility, speed of transactions, high-frequency trading as well as "outright cheating, and whether or not the futures market is broken and no longer works as an effective price risk-management tool."

Anderson noted prices declined in late 2015 as production increased due to higher cattle weights. Further, beef imports increased while exports declined, leading to an additional 750 million pounds of beef on the market. Added to that, cattle feeders were suffering financial losses, causing them to bid lower for feeder cattle.

Many of the same groups that testified on the House side on Tuesday will be on the Senate side on Thursday as the Senate Agriculture Committee holds a similar hearing. The U.S. Cattlemen's Association will testify at that hearing and express some concern about getting the futures board to line up more with case trade to provide producers with better price discovery. USCA would like to see price reporting modernized, as well as enforcement of the current Packers & Stockyards Act.

Another group not testifying this week -- the Ranchers-Cattlemen's Action Legal Fund -- has instead been able to get the Government Accountability Office to look into the decline in cattle prices over the latter part of 2015. R-CALF argues that meatpackers colluded to bring heavier cattle to slaughter during the last half of the year. R-CALF got a bipartisan letter from members of the Senate Judiciary Committee to request the GAO investigation into why prices suddenly fell roughly 15% late last year.

Chris Clayton can be reached at chris.clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(AG/SK)

Chris Clayton