Comment Text:
I am glad to have the opportunity to comment on the CME Live Cattle and Feeder Cattle Futures Daily Limit Proposal. I appreciate the effort on the part of the CME to attempt to move the daily limits to levels which are not regularly settled at. After discussing this topic with several major larger players in this marketplace, it appears to me that the concept of variable pricing could be successful, but the 4.25% being used may be too aggressive.
Presently it is a fixed 3.00 dollars a hundred weight limit on the live with feeders being a 1.5 ratio to the live limit. I have received a lot of feedback from users that they are uncomfortable in jumping all the way to the 4.25% level of the lookback price with a 4.00 floor. I think there needs to be further discussion on this before it is implemented.
In conjunction with this is the move to be more restrictive on the feeder limit from a ratio of 1.5 of the live limit down to a ratio of 1.25 of the live limit. The feeder limit had been moved to the 1.5 ratio for good reason after being at the same limit as the live cattle. The CME had to do an emergency action back in December of 2014 expanding the feeder futures to 150% of the live limit or 4.50 per hundred weight. This action taken by the Business Conduct Committee of the CME in their words "was necessary for promoting price discovery in Feeder Cattle and Live Cattle Futures contracts and their associated products under current market conditions".
One can call any feedyard up on the telephone and inquire with them what a 4.00 dollar move in the price of the deferred live futures would do to their feeder bids being used for procuring feeder animals. Real simply, here is some quick math. A $4.00 dollar per hundred weight move on a 1,450 lb animal represents a change in the value of that animal of $58 dollars (4.00 X 14.50). Therefore to keep their feeder bids in line based on an 800# feeder animal it would change their bids by 7.25 per hundredweight ($58/8). This represents a ratio of 1.8125. The CME is planning to move the ratio the other direction making it more constrictive down to the 1.25 ratio. This is a major step backwards opening up the need at some future time for an emergency action on the part of the CME again.
In summary, I feel that there is a large contingent of users who feel that the CME may be too aggressive jumping all the way to the 4.25% variable price limit for the live cattle. Likewise, the move to be much more constrictive on the feeder limit defeats the purpose of keeping the market from settling at the limit. Overall, this proposal by the CME did not seem to be vetted by a lot of major users who use this contract on a daily basis to manage their risk. It would be nice to see the CME withdraw this proposal and come back with something more feasible to the risk managers who use this contract as an integral part of their daily operations.
James Bugz Brooks
R. J. O'Brien & Associates
