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CME Change In Feeder Index Is Needed

When you’re selling cattle, they’re always worth more than a buyer is willing to pay. Beyond that, determining the value of cattle of a particular weight, sex, class and condition, in a particular area at a particular time, revolves around current, future and comparative worth based on a number of variables.

That’s why I was surprised to learn recently that determining the value of feeder cattle was as easy as consulting the daily Feeder Cattle Index calculated by the Chicago Mercantile Exchange (CME). And, that altering the weights used in its calculation would be so economically devastating.

“The Feeder Cattle Index is an important price-discovery tool in both the cash cattle market and the feeder cattle futures market, as it provides the basis for determining the daily average market price for feeder cattle…

“…the National Cattlemen’s Beef Association (NCBA) proposal would literally transfer millions, if not billions, of dollars away from feeder cattle producers and directly to the packers and their cattle feeding operations… NCBA’s proposal is designed to break the feeder cattle board, causing direct financial harm to every U.S. cow-calf producer, backgrounder and stocker that markets feeder cattle.”

Yikes! Those statements were part of a news release distributed by R-CALF on March 8. It was in response to NCBA and other organizations’ support for the CME’s consideration to increase the lightest and heaviest weights of cattle sampled for the Feeder Cattle Index by 50 lbs.

If believed, those statements epitomize a level of ignorance that defies imagination. The CME Feeder Index is used as the cash settlement price for the CME’s Feeder Cattle Contract. It is derived from the seven-day average of Medium and Large #1 and #1-#2 steers weighing 650-849 lbs. sold direct or via auction that is reported to the Agricultural Marketing Service – from a 12-state region. Under consideration is upping the weight range to 700-899 lbs.

Anyone using the CME’s Feeder Cattle Index as some sort of proxy for spot-market feeder cattle price discovery is shortchanging himself. The weight spread is too wide, the geography represented by the data too variable and the time-lag too long. At best, it offers a directional indicator of whether the seven-day average of a limited class of single-sex feeder cattle was more or less on a given day compared to another.

In simple terms, the more accurately a cash settlement price reflects the futures contract it underpins, the more effective the contract is for risk management.

You may have heard that feeder cattle are carrying more weight on average heading into the feedlot.

Don Close, Texas Cattle Feeders Association market director, says you can easily document that live weights of fed cattle have increased an average of 100 lbs. during the past five years. Part of that has to do with modern cattle genetics, and part due to the ongoing trend for cattle to be placed in feedlots at heavier average weights.

“With nearly 40% of this nation’s corn being used for ethanol, and the impact that has on prices, for the foreseeable future, it is unlikely cattle feeders will have the incentive to aggressively place cattle at lighter weights,” Close explains.

So, it makes logical, proactive sense for NCBA and other organizations to support a move that would allow the index to more accurately reflect the reality of the marketplace, thereby strengthening effectiveness of the Feeder Cattle futures contract for risk management.

CME has adjusted the index weights four times the past 25 years. As with past changes, Close emphasizes the adjustment being considered would do nothing to change the price of feeder cattle or the price distribution between weight classes.

Initially, the basis could widen to reflect the change. And, if anything, Close says, more completely decoupling heavy calves from yearling feeders in the index could be supportive to calf prices.