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Stocker cattle futures are six months-old, and like most six month-old babies, they're at a crawl. "Not a lot of people are trading stocker contracts yet, but there are a lot of people learning about them," according to Clinton Hakes, Senior Director of Commodity Marketing for the Chicago Mercantile Exchange (CME). Hakes says that like any new contract, stockers have to build their business. "Since there are not a lot of contracts traded, some cattlemen are reluctant to get in because they might not get out when they want to," he says. The contracts are cash settled, explained Hakes, so if a producer will sell his cattle around the time the contract is settled, the contract can just expire. The contracts were developed as a risk management tool for the producer who markets stocker cattle, according to the CME. It considers stocker cattle as those who are weaned from the cow, but are too small to be feeder cattle placed in the feedlot. The contracts specify 25,000 pounds of 500-599 pound medium frame #1 and medium and large frame #1 feeder steers. "Stocker cattle futures and options will provide yet another opportunity for the livestock industry to hedge their risk," said Tim Brennan, Chairman of CME's Agricultural Oversight Committee. "The contract provides the nearly 800,000 calf producers in the United States their tool to directly protect themselves from lower prices." The contracts are designed for spring calvers, who typically sell their calves in the fall or early spring. The front month of the contract is October, followed by November, December, January, February and March. "Our USDA market reporters' data determined those were the months when most calves were sold," Hakes says. At this time, fall calvers do not produce enough volume to justify an index for the summer months. Interest in the contracts has been tremendous, according to Hakes. He is traveling across the country presenting educational seminars on how the stocker contracts can manage risk. "We've had more than 100 people at some of the seminars," he says. "The CME makes a big effort in teaching people. We also encourage the universities to continue educating producers about the contracts." Despite all of the interest, Hakes admits the stocker contracts will not be an overnight success. He believes it could take a few years before a large volume is established. "In order for the contract to really grow, the hedgers and speculators must work together. But so far, most speculators are not interested in the contract. They must be able to get out of the contract if the market moves against them. With the limited number of contracts traded, getting out isn't always easy," says Hakes. Likewise, puts and calls are not available at this time. "It will be a while before options start. You need a viable market in order to offer options." Although it will take some time, Hakes sees the stocker contracts as a natural addition to the CME. "You have a natural seller in the cow/calf producer, who is protecting the price from going down. You also have a natural buyer, the stocker operator, who is protecting the price from going up. A buyer and a seller--that's just what you need to create a viable futures contract." |
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