Comment Text:
Chairman Tarbert:
We appreciate the CFTC allowing feedback to the proposed increase in speculative position limits to the CME Live Cattle Contract. The use of the contract as a risk tool is vital to the cattle feeding industry and changes to the contract and how it effects basis and convergence at expiration is critical to the industry and the long term health of the contract.
The CME has made many changes to the contract in the last five years. Increasing delivery points has helped provide more opportunities to deliver but we have also lost a delivery point so the net change is not a dramatic increase, especially one justifying a 33% increase in speculative position limits. Additionally, there has been a sharp increase to the choice specification to the contract since 2016, but no other other changes to the other specifications. Allowances for heavy weight carcasses or higher yield grade's are standard in the industry and has been a major reason for the increase in higher grading cattle. Mostly importantly, delivery weights of both steers and heifers have remained the same despite the trend in the industry of feeding cattle longer to heavier weights. The net effect is that the deliverable supply is much smaller than CME uses to justify the increase in position limits.
We are especially concerned with the increase being initiated on contracts with listed open interest. Cattle feeders that use the contract to hedge to reduce risk estimate a basis when initiating a hedge, typically 120 to 270 days prior to expiration. Increasing the speculative position limits so quickly forces all of our cattle feeders to have more basis risk on their entire inventory most likely having a negative effect on profitability.
Respectfully,
Michael Leheska
