Today’s futures markets are places where participants trade all kinds of commodity and financial derivatives, from oil and gold to foreign exchange and interest rates. But before the 1960s, futures markets were solely places to trade grain, produce or dairy products like butter and eggs (CME began as the Chicago Butter and Egg Board). One of the great innovations in commodity markets happened in 1964 when CME’s Live Cattle contract was introduced as a way to help cattle producers manage risk the same way grain producers had been doing for 100 years. The contract opened the door to contracts in other live commodities, including lean hogs two years later.
As we mark the 50th anniversary of the launch of the contract (November 30) and the 30th anniversary of Live Cattle options on Futures (October 30) it’s fascinating to look at how trading in Live Cattle has grown. Like most futures contracts introduced to new industries, Live Cattle took some time to gather momentum, though many producers were interested in using it right away. 191 contracts traded on the first day, and the average daily volume in 1965, the first full year of trading, was 235. The October 2014 average daily volume was 46,154.
The highest-ever volume for the Live Cattle contract in a single day was 147,566 on March 9, 2011
Some of the growth can be attributed to the introduction of electronic trading, which made it easier for more producers, processors and others in the beef value chain to enter the market. But just as important is a change in philosophy within the cattle industry about the importance of risk management. The combination of this change in approach, technology and the ability to use that technology has invited a surge of new participants into the market. That means more liquidity, and the ability for hedgers to lay off risks more efficiently.
The Live Cattle contract was introduced to function as a risk management tool for commercial hedgers. That’s still who the contract is designed to serve, though that audience has grown substantially. With more liquidity, advanced technology, and a much greater diversity of participants, the market of today might be unrecognizable to the people who traded on that first day. However, 50 years later, the goal is the same — allow the beef industry to manage its risk in the most efficient way possible.
In the video above, Tim Andriesen, CME Group’s managing director of Agricultural Products, discusses the impact the contract continues to have on the cattle industry. Two producers, Luke Lind of J & F Cattle and Jordan Levi of Arcadia Asset Management, also discuss the importance the contract has had on their business.