Though taper talks have dominated the headlines in recent months, investors are once again turning their attention to Washington as Congress struggles to come to a bi-partisan budget agreement. On Tuesday, the U.S. federal government officially shut down after Democrats and Republicans failed to agree on a fiscal budget. And though the government has stressed that all “essential” operations would continue, investors are already feeling the impacts of the shutdown [for more commodity futures news and analysis subscribe to our free newsletter].
In a letter to its customers, the CME Group warned that more than likely a prolonged government shutdown would impact settlement procedures on certain dairy and livestock products at the CME Group. The U.S. Department of Agriculture has also issued statements that it has begun furloughing staff who produce various daily and weekly reports on agricultural data. And for those wanting to take a look at previously published reports, you’re seemingly out of luck as the USDA website states “Due to the lapse in federal government funding, this website is not available.”
According to a spokesman from USDA, the National Agricultural Statistics Service, which reports crop, export, and other agricultural projections, will not be issuing any reports on days the government is shut down. With the lack of data, prices for billions of dollars worth of corn, soybeans, wheat, cotton, dairy, and livestock products could be affected. The USDA did note, however, that meat and poultry inspections would continue since federal law requires these inspections for safety and health reasons [see Ukraine Ignores Russian Threats Against New EU Trade Deal].
The CME also warned investors that because settlement prices for certain CME livestock contacts are cash settled against a cash price index–based on USDA data–it may require the exchange to modify the current settlement procedures for these contracts.
To understand exactly how this would impact prices, take a look at how lean hog futures are settled. Currently, lean hog futures are settled against a two-day moving average index price, which is calculated based on cash prices gathered nationally by USDA’s Agricultural Marketing Service. If the USDA is not reporting these cash prices, then the upcoming October 2013 contracts could be disrupted since the data needed to drive these indexes is not being released [see Why the WTI Vs. Brent Crude Spread Is Shrinking].
Since October contracts on lean hogs expire October 15, the government shutdown would have to end by next week in order for the USDA to gather two day’s worth of cash prices to drive the lean hog index. For feeder cattle futures, which are based on a seven-day index, the deadline would be slightly further away as these contracts typically expire the last Thursday of the contract month.
What Could Be Affected
According to the CME, the following livestock futures contracts and options could be impacted if Congress does not come to a consensus on the U.S. fiscal budget:
- Lean Hogs
- Live Cattle
- Feeder Cattle
For the time being, dairy contracts will not be affected since the federal rule-making body overseeing purchases from dairy farmers released prices on Wednesday, just in time for the affected product contracts to settle as scheduled. These contracts include class III milk, class IV milk, butter, whey, cheese, and non-fat dry milk [see 5 Commodity Trading Mistakes You Could Be Making].
For those investors using exchange traded products to gain commodity exposure, the following funds could also be affected:
- DJ-UBS Livestock Total Return Sub-Index ETN (COW): This fund tracks an index that is composed of two livestock commodities contracts: lean hogs and live cattle.
- E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC): This ETN measures the collateralized returns from a basket of futures contracts representing the livestock sector, though contracts are diversified across two constant maturities of three and six months.
- Pure Beta Livestock ETN (LSTK): Like UBC, this livestock ETN is also designed to mitigate the effects of contango; the underlying index has the flexibility to roll into one of a number of futures contracts with varying expiration dates. Currently, the fund has roughly two-thirds of its assets invested in live cattle contracts, and the remaining one-third in lean hogs.
Disclosure: No positions at time of writing