Chicago Mercantile ExchangeFounded in 1898 as the Chicago Butter and Egg Board(Chicago Board of Trade was chartered in 1848)
By 1919 it was known as the Mercantile Exchange 1961 – Introduced trading of frozen pork bellies
Pork bellies, more commonly known as bacon, are obtained from the underside of a hog. A hog has two bellies, generally weighing about 8-18 pounds, depending on the hog's commercial slaughter weight.
In 1964 Live Cattle futures were introduced. The first futures contract that is based on a non-storable commodity.
1972 - Introduced currency futures1981- Eurodollar futures were introduced (Interest Rate Futures)
1982 – Stock Index Futures (S&P 500)2002– CME Converts from a Not -for-Profit Membership Entity to a for profit corporation.
CME has four major product areas:Interest RateStock IndexesForeign ExchangeCommodities
LIVESTOCK FUTURES MARKETS PRICE RISK
PRICE RISK INVENTORY UNKNOWN AND VARIABLE PRICES
LIVESTOCK PRODUCERS FACE RISK FROM: PRICE OF THEIR PRODUCTS PRICE OF INPUTS
Cattle Prices Weekly Lean Hogs
Corn Prices Weekly Corn
CHICAGO MERCANTILE EXCHANGE LIVE CATTLE LEAN HOGS FEEDER CATTLE PORK BELLIES
LIVE CATTLE CONTRACT SIZE: 40,000 LBS DELIVERY MONTHS: FEB, APRIL, JUNE, AUG, OCT, DEC HOURS OF TRADE : 9:05 AM TO 1:00 PM LIMIT: $3.00/CWT
LEAN HOG CONTRACTS: CONTRACT SIZE : 40,000 LBS DELIVERY MONTHS: FEB, APRIL, JUNE, JULY, AUG, OCT, DEC. HOURS OF TRADE: 9:10 AM TO 1:00 PM LIMIT MOVE: $2.00/CWT
FEEDER CATTLE CONTRACTS: CONTRACT SIZE: 50,000 LBS DELIVERY MONTHS: JAN, MARCH, APRIL, MAY, AUG, SEPT, OCT, NOV. TIME OF TRADE: 9:05 AM - 1:00 PM
LEAN HOGS LIVE HOG CONTRACTS WERE REPLACED WITH LEAN HOG CONTRACTS IN 1996 WHY? 70% OF U.S. HOGS ARE BOUGHT ON CARCASS BASIS
A LIVE ANIMAL YIELDS APPROXIMATELY 74%, THUS A LEAN HOG VALUE IS EQUIVALENT TO THE LIVE HOG PRICE DIVIDED BY .74
SO IF LIVE HOGS ARE PRICED AT $40.00/CWT A LEAN EQUIVALENT WOULD BE 40/.74 = $54.00
HEDGING AND SPECULATION HEDGING -- TAKE AN OPPOSITE POSITION IN THE FUTURES AS YOU HAVE IN THE CASH MARKET.
THE BASIC PREMISE: CASH PRICES AND FUTURES PRICES MOVE GENERALLY IN THE SAME DIRECTION
THUS A LOSS IN THE CASH MARKET WILL BE MADE UP IN THE FUTURES MARKET.
SPECULATION: BUY LOW SELL HIGH
IT DOES NOT MATTER IN WHICH ORDER FUTURES MARKETS ARE ATTRACTIVE TO SPECULATORS BECAUSE A. MARGIN B. VOLATILITY
THE CURRENT MARGIN ON A LEAN HOG CONTRACT IS ABOUT $1000 (THE EXCHANGE SETS THE MINIMUM)
EXAMPLE APRIL HOGS ARE TRADING AT ABOUT $65/CWT $65/CWT X 40,000 LBS = $26,000 MARGIN IS ABOUT 4%
MARGIN IS A PERFORMANCE BOND - INITIAL AND MAINTENANCE IF YOUR EQUITY DROPS BELOW MAINTENANCE LEVEL YOU MUST DEPOSIT MORE MARGIN
LIVESTOCK BASIS 1) LOCATION 2) QUALITY 3) FOR DEFERRED CONTRACTS -- ANTICIPATED SUPPLY AND DEMAND
HOGS CURRENT CASH = $59.50 APRIL FUTURES = $57.55 JUNE FUTURES = $ 66.40 JULY FUTURES = $ 66.33 OCTOBER FUTURES = $55.17
BASIS OVER TIME PRICE DIFFERENCES + 0 - TIME
WHY MUST CASH AND FUTURES COME TOGETHER? ARBITRAGE BETWEEN THE FUTURES AND THE CASH