As cattle supplies have dwindled to decades-old records over the past few years, cattle producers and their industry representatives have pushed for greater flexibility with one of ranchers’ best price defensive tools: futures.
A small but notable win was scored in this area last week when CME announced it will accept heifers as deliverable against the live cattle contract. This will give producers more to work with when making cattle deliveries against contracts.
“Effective with the August 2015 delivery month, the amendments will allow heifers to be deliverable against the Live Cattle Futures contract but be subject to additional eligibility requirements,” noted the CME announcement of the decision. The additional restrictions are as follows:
• Eligible fed heifers must weigh between 1,050-1,350 lbs.
• “Heiferettes,” cows, and bred heifers are not eligible for live delivery.
• Deliveries must be made in samesex loads and labeled as such.
• Producers delivering heifer loads must sign the Progestin Supplement Affidavit and the Open Heifer Protocol Affidavit.
Deliverable heifers will be held to the same standards as steers in many respects. Yield, quality, and age specifications will be the same between steers and heifers, and heifers will be deliverable on par value with steers. This latter detail is in keeping with recent average market prices for FOB and delivered heifers compared to steers.
Though heifers are dependably lighter than steers, average prices between the two have been closely comparable if not the same.
Discounts and penalties will apply for hardbone, dark cutters and heifer loads declared undeliverable. Discounts will be based on the USDA “5-Area Weekly Weighted Average Direct Slaughter Cattle; Premiums and Discounts” report and penalties for undeliverable heifer loads will be $2.50 per hundredweight.
According to an email sent to WLJ, the amended contract will debut a bit later than usual for new contract months.
“Pending all regulatory reviews, these changes will be effective beginning with the August 2015 contract month, which will be listed for trade date Mar. 17, 2014,” wrote Chris Grams, CME’s Director of Corporate Communications.
“The August 2015 contract will be delayed until Mar. 17 in order to incorporate this important change for our customers.”
In April of last year, the National Cattlemen’s Beef Association (NCBA) sent a letter to CME requesting alterations to the delivery requirements for live cattle contracts. The letter, which pushed for an increase in allowable steer weights and the inclusion of fed heifers as delivery options, was part of a long-running effort to increase the options available to cattle producers.
“When you look at including heifers in particular, it’s making sure there are adequate deliverable cattle on the CME live futures contract,” said Colin Woodall, NCBA Vice President of Government Affairs at the time. He had explained that the popularity of branded beef programs, let alone the general reduction in available fed cattle for slaughter, pulls a lot of steers out of the pool of deliverable cattle. With heifers now eligible for delivery, some of this may be alleviated.
As of the January Cattle Inventory report, “other heifers” at 500 lbs. or more— generally those that will be feeder heifers rather than retained as replacements— were down 5 percent (8.74 million head) compared to Jan. 1, 2013. Additionally, all cattle on feed at the time were down 5 percent and steers 500 lbs. and over were down 3 percent. Bottom line: the key classes of cattle available in the near term that are or will become fed cattle are down.
Though heifers represent a smaller portion of the slaughter cattle population, making heifers deliverable will help with decreased overall availability. It is unclear how much this will help, but at the very least it provides another option for producers seeking to deliver cattle against the live futures contract. — Kerry Halladay, WLJ Editor