The Cattle Range Home Page
December 4, 2017
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A Call For Liquidity In Futures Markets

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A Call For Liquidity In Futures Markets
Ag Center Cattle Report

Extreme volatility has plagued the CME cattle futures for a couple of years. Price moves like this past week are all too frequent and leave industry players scratching their heads as to the causes of the largely unexplained moves. Solutions have been widely varied and certainly moves by the Exchange to pare trading hours to the daytime session certainly helped. The problem boils down to contract construction and traders who are unwilling to trade a product they canít see and/or understand. This in turn impacts liquidity and lower liquidity means higher volatility.
 
There is no way to prevent market moves or sudden changes in price caused by market events or news. This is healthy. Markets react to live and continuing news surrounding the marketplace. Sometime that news is disruptive to the point of causing limit moves. Less significant news reports have smaller impacts. Traders attempt to take new information and act on it in an effort to capture market impacts. This is the way markets should work.
 
The internet has introduced a new dynamic into the market Ė quick delivery of information and the potential for viewing the impact on the cash market in real time as transactions occur. This tool has been underutilized by the beef industry but the CME will introduce a new Bitcoin futures product on December 18th. The Bitcoin cybercurrency is capturing headlines for its runaway skyrocketing price. Traders in the futures price will be able to view the cash market in Bitcoin as it occurs and the futures contract will cash settle to the latest price in the spot market. The Bitcoin market is built on blockchain technology that has broad applications in the cattle industry.
 
The CME feeder contract is cash settled but the model for calculating the cash index and the method for gathering of data are outmoded and CME is looking for new technologies to gather and calculate the index. No technology fits the need better than a blockchain or series of time stamped buy/sell feeder transactions linked together in a manner that creates a fully transparent market in feeder cattle. A blockchain will instill confidence of all traders and industry players in the integrity of price settlement as would a blockchain in the live contract.
 
The feeder market is challenged in a way not present with fed cattle sales. Fed sales are all consummated through four primary beef processing companies thus providing the infrastructure for reporting of almost all transactions in the fed cattle trade. Feeder cattle are traded through an opaque network of hundreds of dealers and direct farmer to feedlot relationships. This requires a foundation to force the reporting for yearlings and calves sold in the marketplace.
 
Identifying the national cattle herd with an ID for each animal is just such a foundation. This would create the need for reporting each transaction as it occurs because each buy/sell trade involves a change in ownership that must be reported to the national datastore. Along with capturing an ownership change both change assuring the proper title and lienholder, the transaction would create a price point for the transaction and link it into the blockchain. Blockchains are the perfect vehicle for handing each transaction and provide the complete unimpeachable record of the cash market in all cattle trades. This instills confidence into the marketplace for futures and recruits new traders. Those traders, who have previously stood aside from the cattle futures, bring the necessary liquidity our markets sorely need.

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