October 15, 2003
US Chicago Mercantile Exchange Attempts to Bring Down High Cattle Price
A record surge in U.S. cattle prices pushed the Chicago Mercantile Exchange (CME) on Tuesday to try to restore order to cattle futures trading and assist trapped cattle producers who have been losing thousands of dollars a day.
The CME first raised by 33% the margins or good-faith charges that traders must deposit to trade live cattle. It then also said it would more than triple the daily trading limit that cattle futures can move if the market continues to lock up at its current 1.50-cent a pound limit.
The moves come amid an unprecedented squeeze on U.S. cattle supplies and a record climb in U.S. cattle prices. The phenomenon is mainly tied to a ban on imports of Canadian cattle and beef since May 20.
The ban followed the discovery of a case of mad cow disease in a single cow in Alberta. The cattle ban remains in place. Canada accounted for about 7% of U.S. beef supplies last year.
Since May, beef packers have seen demand for "mad cow-free" U.S. beef soar at home and abroad and their profits go through the roof, even as cattle supplies tightened.
On Tuesday, National Beef Packing Company LLC, the fourth largest U.S. beef packer based in Kansas City, Missouri, said it cut production at two of its beef slaughter plants indefinitely because of a shortage of market-ready cattle.
Analysts have tied that shortage most recently to the cash and futures markets moving well out-of-sync, leaving the traditional "hedgers" trapped in losing positions but without a liquid market to escape the trap.
Short hedgers sell futures when they buy live animals to be fattened on feedlots before slaughter. If cash prices fall, the short futures provide an off-setting paper gain, or hedge.
Under normal circumstances, producers would sell the cattle to a beef plant and simultaneously buy back the short hedge.
But 6 straight days of 1.50 cents an lb limit-up gains in CME October futures squeezed such cattle owners, who normally would be cheering a rising market. The gains have prevented many from buying futures to "lift" or cancel their hedges.
Each day October futures moved limit up, short hedgers had to pay a margin call of $600 or more to maintain each short contract.
On Tuesday, after the CME moves, October opened and stayed limit up for a seventh straight day, standing at 100.325 cents a pound at midday, a record high for a CME live cattle contract. However, other cattle contracts were trading more actively and some deferred deliveries were even limit-down as speculators decided to cash in winnings.
Cattle analysts and traders said that the CME's moves may be a little late but sent the right message to speculators.
"We are selling cattle at $115 in the country and the October cattle is at 100. They should have done this a week ago to let the hedgers out of their contracts," said Bob Anderson, market analyst with Des Moines-based Commodity Services Inc.
"With the expanded limit tomorrow, if they can get out of some stuff, lift some hedges, then they can sell the cattle and that will start to cool off the cash market," said Chuck Levitt, senior livestock analyst with Alaron Trading Corp.
If October live cattle end 1.50 cents higher on Tuesday, the daily trading limit expands to 5.00 cents, the CME said.
"Eventually this will allow them to trade cattle. I know of one feedlot who has everything hedged and he was not trading cattle this week because he can't lift his hedges," said Jim Gill, marketing director at Texas Cattle Feeders Association.