Is it time for a boneless beef trimmings derivative contract? David Farley 1 st March 2012
Why does AAco care? 680,000 head of cattle Substantial price risk over which AAco has limited ability to take protection AAco 2012 2011
Number of contracts outstanding Why this is different? CME Live Cattle Futures Open Interest the markets have grown! 420000 400000 380000 360000 340000 320000 300000 280000 260000 240000 220000 200000 180000 160000 140000 120000 100000 80000 60000 Boneless beef futures market operating on the CME 40000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Chicago Mercantile Exchange (CME), 2011
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers Little pricing intervention by government Large deliverable supply Good information on cash markets
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers
USd/lb Increasing trim prices 220.00 US domestic 90CL 200.00 180.00 160.00 140.00 120.00 100.00 Jan Mar May Jul Sep Nov 2010 2011 2012 5yr Avg USDA, 2011
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 USd/lb Very high volatility in trim markets 250.00 US domestic fresh and imported frozen 90CL 1990-2011 2008-2011 200.00 150.00 1990-1993 100.00 50.00 0.00 Domestic Fresh 90CL Imported Frozen 90CL Informa Economics/ AAco 2012
USd/lb Australian and New Zealand context 4.00 3.50 3.00 Australian US Cow, NZ Cow and NZ Bull Prices Jan 11 - Present Feb 08-Jun 09 2.50 2.00 1.50 1.00 Australia US Cow N. Zealand Cow (195-220k cwt) N. Zealand Bull (270-295cwt) AAco, 2012
04/26/03 07/26/03 10/26/03 01/26/04 04/26/04 07/26/04 10/26/04 01/26/05 04/26/05 07/26/05 10/26/05 01/26/06 04/26/06 07/26/06 10/26/06 01/26/07 04/26/07 07/26/07 10/26/07 01/26/08 04/26/08 07/26/08 10/26/08 01/26/09 04/26/09 07/26/09 10/26/09 01/26/10 04/26/10 07/26/10 10/26/10 01/26/11 04/26/11 07/26/11 10/26/11 US$/k Increasing volatility in trim markets, the volatility is widespread 3.50 Manufacturing Meat Prices 3.00 2.50 2.00 1.50 1.00 0.50 Uruguay Manufacturing Argentina Manufacturing AAco 2012
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers
USd/lb Homogenous product price relationships USA Beef Trimmings 200.00 150.00 100.00 50.00 0.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dom 90 85CL 75CL 65CL 50CL Informa Economics, USDA 2012
But what about primal cuts? USDA 2012
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers
Global protein consumption increasing 7.5% 41.4% 47.7% 29% 70.2% 23.7% 32.2% 48.7% 23.3% Food and Agricultural Policy Research Institute (FAPRI), 2010: Protein consumption over the past ten years
Thousand Metric Tons Developing countries increasing consumption 12,000 Beef consumption (including veal) 10,000 8,000 6,000 4,000 2,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Brazilian Chinese Indian Other African Other Asian Food and Agricultural Policy Research Institute (FAPRI), 2011
Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 USD/kg World Steer Prices: Brazil, USA, Australia, Uruguay, Argentina 5.00 Global Manufacturing Prices 2003-2012 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 Uruguay Best, +460k Argentina Domestic 420-440k Brazil Sao Paulo USA Steers Australia Trade Steer (170-230k) AAco, 2012
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Cow and Bull Slaughter (000s) US Beef Imports (million lbs) US cow and bull slaughter v imports 9000 4000 8000 3500 7000 3000 6000 5000 4000 3000 2000 2500 2000 1500 1000 1000 500 0 0 Cow & Bull Slaughter US Beef Imports USDA, Informa, 2011
Beef and veal imports 3,500,000 US Beef and Veal Imports by Country 000 pounds 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2007 2008 2009 2010 2011 Canada Australia New Zealand Total U.S. Dept Commerce, Bureau of the Census, 2011
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers
Large number of buyers and sellers Californian dairy sector Japanese Importers Traders Hedge funds Day traders Pastoralists International trading houses Speculators Uruguayan exporters Packing houses Feedlotters JBS/ Cargill Australian beef processors New Zealand bull farmers New Zealand processors AAco New Zealand dairy sector Australian beef producers
1,000 Metric Tons Global beef (including veal) production 60000 58000 56000 54000 52000 50000 48000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(p) 2011(f) USDA/FAS, Informa, 2011
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers
Current reporting mechanisms USDA Blue Sheet (domestic) USDA mandatory pricing Yellow Sheet (imports) Is this sufficient?
Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers
Is it time for a boneless beef derivative contract? David Farley 1 st March 2012
Scott Hansen Managing Director - MLA SAFF Livestock Industry Seminar
CME Group Agricultural Products Brisbane, March 2012
CME Group Agricultural Products Grains & Oilseeds Livestock Dairy Forestry Commodity Indexes Weather OTC Clearing 2011 CME Group. All rights reserved 29
2011 CME Group. All rights reserved 30
2011 CME Group. All rights reserved 31
ADV (in thousands of round turns) 600 OTC Clearing Services: CME ClearPort Strong track record in energy markets with deep liquidity in key industry benchmarks 500 467,802 494,216 447,189 458,197* 400 300 200 139,177 313,128 335,720 1,200+ products 14,000 users 100 24,137 56,971 0 Product Launches Key Product Additions 2003 2004 2005 2006 2007 2008 2009 2010 2011 10 40 77 91 123 141 360 389 69 Coal Nat Gas Crude Petroleum Products Crude Crude Petroleum Products Crude Natural Gas Electricity Crude Petroleum Products Cleared OTC Ag and GSCI Swaps Cleared OTC London Gold Forwards Freight, Coal, Iron Ore Legacy CME/CBOT ex pit transactions Electricity Delivered Nat Gas Ferrous Metals Electricity Refined Products *As of 12/8/11 2011 CME Group. All rights reserved 32
Bilateral vs. Cleared Swaps Bilateral Cleared Credit Exposure Credit exposure to the swap counterparty Credit exposure is to CME Clearing Margin Requirements Documentation Counterparties Depends on the relative credit worthiness of the counterparties Swaps trade under an ISDA master agreement and schedule of amendments that can take 4-16 weeks to get in place Limited to market makers with whom the swap user has an ISDA and credit line Exchange sets margin with possible offsets against other exchange traded products For customers with an existing futures account, you can register online Open to any swap market maker who will give up the transaction to be cleared on CME Flexibility Complete flexibility Limited flexibility but may be greater than exchange traded futures Exit Liquidity May be limited to the original trade counterparty depending on structure Open to any OTC provider who will give up the transaction to be cleared on CME 2011 CME Group. All rights reserved 33
Existing Swap Volume Over the past 12 Months Feb, to date 2011 CME Group. All rights reserved 34
Disclaimer Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. CME Group is the trademark of CME Group, Inc. The Globe Logo, Globex and CME are trademarks of Chicago Mercantile Exchange Inc. CBOT is the trademark of the Board of Trade of the City of Chicago. NYMEX is the trademark of the New York Mercantile Exchange, Inc. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. The information contained in this presentation represents the views and opinions of the speaker and are not necessarily the views of CME Group. All matters herein pertaining to requirements for membership and clearing membership, clearinghouse procedures, contract specifications and other matters governed by our rules are made subject to and are superseded by official CME, CBOT, NYMEX and COMEX rules and other governing documents. Current rules should be consulted in all cases concerning contract specifications. Copyright 2011 CME Group. All rights reserved. 2011 CME Group. All rights reserved
2011 CME Group. All rights reserved