Addressing cattle market volatility

After hearing concerns from membership nationwide, the National Cattlemen’s Beef Association (NCBA) is addressing the CME Group about volatility in the cattle markets. Increased volatility caught the attention of producers at the end of 2015 and it remains a concern.

“This volatility is absolutely killing our producers who are trying to use these tools to manage risk and we keep hearing from our members that because of the price swings, even the tool that’s used for risk management is not as effective as it once was,” said Colin Woodall, NCBA senior vice president of government affairs. “Our members have demanded that we move forward and try to find some sort of solution.”

The initial effort from NCBA was a letter to the CME Group asking for some significant changes. NCBA has asked CME to address specific areas of concern including implementing a delay between trading actions, greater enforcement against market spoofing, monitoring and reporting of market misuse, and the release of audit trail data.

“Our success from that letter was not as robust as we had hoped,” Woodall said. “We only got CME Group to change one thing at the time and that entailed putting in place a messaging limit, which would cap how many trades any one firm could make in a single day. Even though that did help to manage volatility to a degree, we saw that volatility come back in the spring and summer of this year.”

That caused NCBA to put together a CME working group at their annual meeting in San Diego. Since then, the working group has been split up into three sub groups. One group is looking into price volatility, another is investigating price discovery in the marketplace and the third group is seeing if the specifications of futures contracts need to be changed.

“There is no one silver bullet,” Woodall said. “In fact, the question of ‘what will fix this issue’ is one that we ask every day. We when put together ideas that we think will work, we will push that through our policy process and see if we can get those changes implemented.”

Risk management options like cattle futures are very valuable to producers across the country and NCBA members have been clear that they want these tools to stay, but they also want them to work.

“CME has made it very clear to us that they want to fix these contracts and make sure that we are satisfied with the way these contracts work,” Woodall said. “The idea of taking these contracts and moving them someplace else may sound like a very good knee-jerk reaction, it’s not an action that we want to see in this overall effort. That’s why it’s important that we continue to work with CME to find a true fix.”

The entire NCBA/CME working group will convene as a whole in October to begin molding some final solutions.

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