Speer: Understanding bloggers, CME and markets

Subjects: Blogger, Iowa, Texas and the Market; These points have been summarized for discussion in my previous column. We build on this by looking at the futures markets and the CME. Why? Because right after I sent in the previous column, I noticed a comment that summed it all up.

Futures: The complaint is that the markets are not working as they should. The indicator is regional. That is, the price difference between Iowa Cash and the August Live Cattle contract (LEQ3) is too large:

…it appears to be so [futures contract] just related to texas…it’s just really frustrating when we’re here while a livestock contract for August that was finalized on Wednesday is expiring [Aug 23] at $178.05 and they’ve already traded cattle in the Northern Plains for $185 and actually $187…what the heck is going on? It doesn’t make much sense [emphasis mine]it doesn’t relate to what this type of market is and what it’s supposed to do… I’m not sure why you would want a contract that doesn’t relate to what it’s supposed to relate to…

That’s a lot to unpack. But let’s approach it with the same systematic methodology as in the previous discussion and see where we end up.

1. Contract Specifications: In particular, the CME contract contains the following specifications: ““Each futures contract shall be 70% selected, 30% selected live Yield Class 3 steer or heifer…” The Texas slaughter mix closely conforms to contract specifications (see Details can be found here). The commentator avoids the important details of what is under the contract.
2. Iowa and Texas: Now we turn to August; Table 1 provides weekly baseline details for the four weeks prior to LEQ3 expiration. Average Texas base is zero (hence agreement with treaty). The base in Iowa now averages $7.85; That’s because the quality mix exceeds the contract specifications.
3. Select Selection/Spread: Due to the different sort mixes, the regional base is inherently affected by pick/pick distribution. Table 2 provides an overview of the average base levels and their relationship to the spread. Note that this year’s August spread is close to $26; Iowa’s base is about 30% of that value — right in line with the pattern seen in previous years.
4. Sequence: The contract also provides: “Trading ends at 12:00 noon CT on the last business day of the contract month.” An assessment of the lack of convergence on August 23 is premature; Six business days remained before the contract could be traded. (Not to mention that the contract defaults to extended limits during the last two trading days.)
5. Base: It reflects the relative supply/demand conditions in a given region. Cattle in Iowa are drawn both south and east, further supporting the regional cash price.

6. Corn: The commenter then follows up with this observation: “You know, if we had corn that was a dollar, like two dollars a bushel, off of what it’s actually making, you know that wouldn’t make much sense either.” But that reality has been there for more than a year as the market rations tight supply. (see grafic)
   

   market work: What’s the point of this whole discussion? First: “There is no there”. But second, and more importantly, there’s always talk on the internet that often simply says, “That doesn’t make much sense.” One reader summed it up best, following last week’s column: ” Facts always come second.”

   So this is a good reminder that with just a little effort in getting to grips with the facts, much of the emotion and division surrounding the business and the markets could be avoided. Because in the end, the facts lead us to the conclusion that everything makes sense.

Nevil Speer is an independent consultant based in Bowling Green, Kentucky. The views and opinions expressed herein do not reflect and are in no way related to a customer or business relationship. He can be reached at [email protected].