Call the Market

Last week, a Special Executive report was released by the CME to announce the new daily price limits for both the live cattle and feeder cattle contracts. The official press release can be accessed here: https://www.cmegroup.com/….

Previously, the live cattle contract allowed a daily price limit of $6.50, but now the contract approves a daily price limit of $7.25, with an expanded limit of $10.75. And the feeder cattle contracts saw similar changes: previously, the feeder cattle contract allowed a daily limit of $8.25 but now approves a new daily price limit of $9.25, with an expanded limit of $13.75.

I share this news with you not because it rocked the market this week -- heck, it looks like the week could trade positively as traders continue to push the contracts higher amid ample fundamental support. But instead, I share this point with you for two main reasons.

First, my dear friend Jess Peterson, a senior policy advisor with the United States Cattlemen's Association, coined the phrase "markets work best with active and informed participants" and you deserve to be informed about this information.

Second, I want to highlight some of the risk that naturally comes with a decision like this.

If I were to report to you that the live cattle contracts closed more than $7 higher on such and such a day, and the feeder cattle contracts closed more than $9 higher on that day, you'd probably read the report, smile, and go on with your business. But if I was to tell you that the same markets closed at their daily price limits lower; meaning $7.25 lower in the live cattle contracts, and $8.25 lower in the feeder cattle contracts, you'd have a much different reaction.

And while the cattle complex has been blessed with a bullish run beyond our wildest beliefs during the last two years, you and I both know that at some point the tide will turn -- prices will venture lower once again. Which is why the market desperately needs safety measures in the contracts to avoid total erosion within a few days' time.

Put that into perspective. Say on any given week the feeder cattle contract closed at its daily limit of $9.25 lower on Monday afternoon, and then from there on the contract closed at its expanded limit lower during the next four consecutive days. That means, in a week's time, the feeder cattle contract fell $64.25 lower in just five trading days ... that's a scary thought to even imagine, let alone navigate business decisions through.

On June 3, the spot August contract closed at $301.22; if the market were to lose that type of ground in today's market environment, that would mean that in five days your spot August contract could go from closing at $301.22 to $236.97 -- which should make everyone very uncomfortable, because we know that when the market feels pressured, it's twice as quick to trade lower than it ever is to trade higher.

So, while the daily limits may be 'fair' in allowing the contracts to have the same daily price limit in either direction the market moves (higher or lower) it would be remiss of me to neglect to inform you about this market update. I pray that we don't see that type of catastrophic erosion in the markets ever -- but you need to be aware of what the contracts are legally allowed to do, and how that could affect your commodity assets.

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

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