New Futures Contract Available
To Manage Stocker Cattle Risk

CHARLOTTE, N.C. — A new risk management tool for the stocker cattle segment of the beef industry has recently become available.

Clinton Hakes, senior director of commodity marketing at the Chicago Mercantile Exchange, provided an overview of the new contract during the Live Cattle Marketing Committee session of the recent National Cattlemen's Beef Association meeting here.

The stocker contract, Hakes said, was designed with the small producer in mind. At 25,000 pounds, the trade unit is half the size of the feeder cattle contract.

"It represents a lighter weight animal that you folks have not been able to use in your risk management plans," he told listeners, "that 500 to 599 pound medium frame No. 1 and medium and large frame No. 1 feeder steer."

There is a maximum daily limit of two cents or $500 per contract with a minimum of $.0005 or $12.50. Initial contract months are January, February and March. Trading began last November. The spring months, Hakes said, are where they expect most of the activity, since about 70 percent of all beef cattle producers have spring calving operations.

The contract is settled on the last Thursday of the contract month, Hakes told listeners, except for the November contract, which terminates on the Thursday prior to Thanksgiving Day, and the December contract, which terminates on the third Thursday of the month.

Options are available on the same contract months but trading hours are slightly staggered from the live cattle and feeder contract hours so traders can participate in the opening and closing. Trading hours are from 9:10 a.m. to 1:05 p.m.

The new contract is cash settled to the CME Stocker Cattle Index, a seven-day weighted average of USDA prices from a 12-state region: Colorado, Iowa, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming. This region was selected, he said, because it produces between eight and 10 million steers on an annual basis, or nearly two-thirds of the total beef cattle supply. The CME Stocker Cattle Index is not a moving average but rather a weighted average.

"A moving average assigns the same importance to each day’s transactions. In other words, Monday’s sales count the same as those on Tuesday or any other day of the week," Hakes explained. "A weighted average, like the Stocker Cattle Index, on the other hand, assigns the same importance to the index value for every pound of stocker steer sold during the previous seven calendar days, regardless of when or where it was sold."

Although the CME Stocker Cattle Index is designed to mirror the CME Feeder Cattle Index, it deviates during certain periods of the year due to different supply and demand conditions, Hakes said. During other periods, however, the indexes follow each other closely.

Thus far, Hakes said, trading on the new contract has been minimal, and he conceded that the historic track record for new futures contract offerings has not been encouraging. A series of seminars are scheduled to bring producers up to speed on the specifics of the new contract.