Global beef futures contract launch likely by April

Jon Condon, 09/10/2012


Australia could have access to a boneless beef futures contract as soon as March or April next year, judging by comments made at a gathering during the Meat Import Council of America conference held in San Antonio last week.

The Chicago Mercantile Exchange, which is driving the scrutiny and development of an international grinding meat futures contract, provided a briefing to potential stakeholders during the MICA conference. The CME Group is the world's leading and most diverse derivatives marketplace for agricultural commodities.

Present at the San Antonio briefing, or connected by phone, were representatives from large US, Australian and NZ processors, grinders, pattie manufacturers, and traders.

The large Californian dairy industry has also taken a keen interest, driven by that industry’s need to liquidate old cows from milking programs. There was also strong interest evident from large food service end-users like Wendy’s and Jack-in-the-Box.

CME representatives told the meeting that based on earlier focus group work with potential stakeholders, it intends establishing two contracts – one for 90 percent lean (90CL) beef and the other for 50 CL beef. The 90CL version is likely to be of greatest interest to Australia, as 50CL manufacturing beef is primarily derived from US grainfed domestic fatty trim.

Based on its research and survey work, CME believes there will be adequate demand for both contracts. The objective is to have them operating by March or April next year.

The model to be taken to the US Commodity Futures Trading Commission for registration will carry a contract size of 40,000 lb (18.2 tonnes), applying to both contracts. A five-day moving price average for both contracts is likely.

By CFTC regulation, non-spot single month position limits and all-months-combined limits will be 1000 contracts. Based on the level of reported sales, the spot month position limit will likely be a maximum of 100 contracts, invoked during the last five trading days or close-out period. There is no reason why that limit cannot be changed at a later date, however.  

One of the concerns raised during discussion by large US food industry players was the limitation on the number of contracts they could hold under the proposed rules, with one stakeholder reportedly suggesting he would ‘grind that amount of beef before lunchtime.’

Others raised the issue of physical delivery versus indexed delivery. The idea behind using an indexed delivery is to provide convergence between the index price and the contracts themselves.

One of the big issues the project now faces before launch is education, in ensuring the market stakeholders know how to use the new risk management tools, and what business advantages they offer.

Similar comments were made when CME personnel visited Australia in March this year, when they briefed local industry stakeholders about the exchange’s plans during a gathering hosted by the Australian Agricultural Co’s David Farley.

There was widespread in-principle support at the Brisbane briefing for a global grinding beef futures contract in which the Australian industry could share.

“This is a tool that the beef industry on both sides of the Pacific is calling on,” Mr Farley said yesterday.

“There will always be those for and against it, but the reality is there is a lot more volatility in meat prices now, and this is a way to lay-off that volatility risk,” he said.

“If the industry wants to improve capital management and access greater capital, we need to be able to demonstrate better margin-making and risk-taking, and a grinding beef futures contract helps deliver that.”

“The beef industry is probably one of the last food commodity industries to get there – the pig industry has it, and the chicken industry does it via wheat futures, because they are virtually converting wheat into meat protein.”

Mandatory price reporting big change

Participants in last week’s US meeting heard that one of the big changes in the latest version proposed by CME, since the earlier attempts to establish grinding meat futures on the New York and Chicago Exchanges a decade or more ago, was the advent of mandatory reporting on price.

“The challenge now is the willingness of our industry to adopt and change,” Mr Farley said.

“It is certainly something our business has been calling for and promoting, and it makes more sense to do it on an international basis, rather than on a domestic level.”

The process had come a long way from the initial interest group meeting held in Brisbane back in March, Mr Farley said.

Participants at that meeting included a wide cross-section of producers, processors, lotfeeders, bankers and financiers, with the consensus expressing positive support for a risk management tool based on a globally-traded futures product built around manufacturing beef.

Mr Farley told the Brisbane forum that the time was right for this new marketing tool, with growing global demand for manufacturing beef as a largely homogenous product that was subject to increased price volatility. Importantly, there was also a large number of buyers and sellers across the world.

"As has been the case in the cotton and grains industries for many years, a futures contract would provide beef producers large and small with a tool to help manage their price risk and move from being price-takers to becoming margin-makers. In doing-so, they can create greater stability and attract more capital to the industry," he said.

"This is a critical and exciting initiative that will transform the way we manage price risk and do business in the global beef industry," Mr Farley said.

Since the Brisbane gathering in March, the CME Group has held a series of discussions in other beef producing countries around the world likely to want to participate in the grinding beef futures contract.

Meat & Livestock Australia managing director Scott Hansen told the Brisbane forum that there was a necessity for more price risk management tools, given the size and export market exposure of the Australian beef industry.

He said one of the key lessons from previous attempts to establish a contract was the importance of the engagement and commitment of commercial players in any potential new market tool.




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