CME livestock, dairy contracts at risk from sequester

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Automatic U.S government spending cuts may affect some CME Group livestock and dairy contracts that depend on USDA grading and inspections, the exchange operator said last week.

A spokesman for the CME did not say if the exchange would be forced to halt trading in some contracts due to the cuts.

"It's possible mandatory spending cuts - should they begin on March 1 - could have an impact on the physical delivery and cash settlement mechanisms of certain CME livestock and dairy products," Tim Andriesen, CME's managing director, agricultural products said in a letter to customers.

The $85 billion in automatic across-the-board spending cuts, known as the "sequester" are set to take effect on March 1 unless Congress can come up with a deal to avoid them. Food inspections, air traffic control, law enforcement and education programs also would be among those hit.

The CME's live cattle contract is dependent on USDA staff that may be furloughed due to the spending cuts. CME said exchange rules allow it to modify the delivery and settlement rules pertaining to the contracts if the USDA staff is not available.

CME did not say if other contracts that could be impacted by the cuts had rules that could be modified to allow for trading. Cash settled livestock and dairy products require data that may be unavailable because of the sequester. Additionally, furloughs for the USDA's grading/inspection staff will impact the exchange's spot call dairy markets.

The daily calculation of the CME Feeder Cattle Index and CME Lean Hog index, as well as the monthly calculation used to determine settlement prices for CME Dairy futures products, could also be disrupted if the USDA's regular schedule of reports is altered by the sequester.

CME said the contracts that may be affected by the budget cuts include:

  • Live Cattle futures Feb 2013 contract
  • Lean Hog futures and options, April 2013 and subsequent contracts
  • Feeder Cattle Futures, March 2013 and subsequent contracts
  • Milk (Class III and IV), Butter, Cheese, Non-Fat Dry Milk, and Whey March 2013 and subsequent contracts
  •  Spot Call (Butter, Cheese and Non-Fat Dry Milk), March 1 and subsequent trading days

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