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Feeder Cattle Index Still May Change

Feeder Cattle Index Still May Change
Supporters say changes to feeder cattle index would match marketplace reality.

During its recent convention, National Cattlemen's Beef Association members passed policy relating to weight specifications of the Chicago Mercantile Exchange feeder cattle futures contract.

Currently, the CME index used to cash settle feeder cattle contracts includes cattle weighing from 650 to 849 lbs. The proposal is to up the range 50 lbs. so the index includes cattle weighing from 700 to 899 lbs.

"NCBA supports removing the 650 to 699 lb. category from the calculation for the feeder cattle index," says NCBA President Bill Donald. "Including an 850 to 899 lb. category makes sense in the current marketplace."

The basic notion

The more closely the feeder cattle contract and the cash index used to settle it reflect actual cash feeder cattle trade, the more useful the feeder cattle futures contract is as a price risk management tool. At issue is what weights best reflect the cash feeder cattle market.

"The realities of the marketplace vary year to year and as a producer, I respond to those changes," Donald says. "The intent is to adjust the index in order to more accurately reflect the realities of the marketplace."  

NCBA Vice President J.D. Alexander, owner of an independent feedlot in Pilger, Nebraska, knows firsthand that a lot of cattle aren't entering the feedlots until they reach the 800 lbs. or more.  "I haven't placed a steer in my feedlot under 800 lbs. for five years," says Alexander. "It is no different than changing the specifications on live cattle contracts to reflect the current actual weights being sold, which is around 1,400 lbs. The feeder cattle change will not affect the profitability of packers or feedlots. It will not negatively impact cow-calf producers. It simply reflects realities, which translates into improved accuracy when managing risk for all of us in the industry."

Alternate view

Ranchers-Cattlemen Action Legal Fund, United Stock Growers of America charges that the proposed change is nothing but a deceptive ploy to break the currently favorable feeder cattle market, thus harming hundreds of thousands of cow/calf producers, backgrounders and stockers. 

"The effect of NCBA's proposal to up the weight-range used to compute the Feeder Cattle Index would be to reduce the per hundredweight value of the feeder cattle cash index, thus lowering the per cwt index value of all feeder cattle," warns R-CALF USA CEO Bill Bullard.

"This is a function of the lower per-cwt. value accorded to cattle as their weights rise. Thus, NCBA's proposal is designed to break the feeder cattle board, causing direct financial harm to every U.S. cow/calf producer, backgrounder and stocker that markets feeder cattle."

NCBA maintains the change would improve marketing for those who hedge with feeder calf futures.

"The revised weight range would better reflect what is actually happening in the industry," NCBA economist Gregg Doud says. "NCBA members have talked about the index revision for at least two years."

Otte is economics editor for Farm Progress Co.

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