New Beef Risk Management Tool Launched in February
A NEW beef industry supply chain risk management tool is nearing commercial launch – likely around mid-February.
Project developer StoneX* expects its new cash-settled Feeder Cattle Swaps product to be ready for launch around this time next month, after 12 months of development and testing.
The Swaps product will be listed up to 12 months in advance, to provide plenty of hedging opportunities for future price movements. The product will be settled in cash, based on the average of the program index for that month.
“Any time a commodity is at the end of the price cycle – as beef cattle are right now – is the perfect time to launch a risk management product like this,” said the StoneX Vice President, Agriculture. Nick Orsich says Beef Central.
“The industry needs the ability to manage price risk at times like this, and swaps offer a way to give the market the opportunity to take some of that price risk out,” he said. -he declares.
At launch next month, StoneX will announce to the market that the project is live and the Swaps product is available for use by stakeholders throughout the supply chain.
Following an education and awareness program towards the end of last year, StoneX already has a group of stakeholders – from pastoralists and large-scale private beef producers to feeders, processors and large end users – set in place with commercial accounts. More are being integrated this month, so when the product opens, they can start trading. Other participants in the supply chain, such as beef traders and livestock specialists, could also use the product.
So for those who are unfamiliar with risk management tools, what are Swaps?
Swaps are paper contracts where risk is offset between two parties – with equal and opposite risks. In this example, StoneX is in the middle, which means that the counterparty for both buyer and seller is StoneX. Neither party knows who the counterparty is. This eliminates any counterparty risk and also maintains anonymity between the two parties – an important feature for the beef and cattle industry in Australia, where many players like to ‘hold their cards close to their chest’.
Margin facilities can also be provided by StoneX after program launch, meaning that participants would not have to tie up working capital to trade.
“For starters, once the product launches next month, we will have offers and offers that we will show to participants involved in the market,” said StoneX breeding program manager. Tim Jude noted.
“We will have offers and offers on either side of the market, like an indicative range of where it is going to trade. (Once registered, everyone is welcome to come in and bid or bid, and at that time the new Swaps product will start trading, and we’ll start reporting to participants where it actually got negotiated,” Mr. Jude said.
StoneX’s new Swaps product has been built around flat back feeder steers with 0-2 teeth (50pc or less Indicus content) of 380-480kg live weight delivered to Darling Downs (300km centered on Dalby).
An important distinction between the new Swaps Index and the EYCI is that the EYCI includes a wide range of breed types, weights and locations, which means that from a hedging perspective the correlation can vary. collapse quickly.
A narrower range of the Swaps Index is likely to generate more confidence in the trade, proponents of the project argue.
Previous hedging tool attempts
Australia has had two failed attempts in the last 30 years to launch a different hedging tool, in the form of a live cattle futures contract. Both fell for a number of reasons including lack of cash, but there has been a lot of water under the bridge for the industry since then, and there is now clear evidence that a growing number of stakeholders are receptive to new risk management tools. .
The fact that there are now more than a million head of cattle regularly fed across Australia alone suggests that the time may be right for the launch of the new Swaps product. Several industry policy and research discussion papers have been published over the past few years calling for greater transparency in trade throughout the supply chain.
Encouraging results from the indicator trial
StoneX had planned around 30 attendees for an initial webinar on the new Swaps product held last year, and eventually attracted 85.
The company set up a “trial” version of Project Swaps last August to test the system and collect data. The indicator was created based on input pricing provided by approximately 25 industry participants and already accounted for “a few tens of thousands” of feeder cattle. Data is collected and processed weekly by collaborators, Argus, adjusted for breed type, location and other parameters.
“The turnout for the trial was higher than we expected,” said Tim Jude. “Even in trial form, it creates a lot of noise in the market.”
The target price started at 489c/lg liveweight in August, rising to 578c/kg by the end of the year. The indicator fell 12-13c in the first two reporting cycles this year, but that was only based on very limited numbers.
Current issues faced by feeders with congestion of fed cattle (click here to see previous story from Beef Central), caused by reduced slaughter rates among processors due to COVID illness among staff at the ‘factory, were blamed for the current decline. Some batch feeders are clearly expecting to source feeder replacements this week until the congestion and backlog clears up.
It’s worth noting that while the EYCI hit new highs this week, fueled by feverish demand for restocking light cattle, the new, more narrowly defined Feeder Steer Swaps Index went the other way. sense.
As the chart published above shows, the index moved sideways in a fairly narrow range after starting at 489c/kg in mid-August, running through the end of September. It then rose steadily, in line with the market, approaching 580c to end the year.
“We’ve seen a correlation with the Eastern Young Cattle Indicator over 90% so far, and an even stronger correlation with MLA’s Saleyard Feeder Steer Index,” Jude said.
“This correlation, combined with the number of index participants we have already attracted, makes us very confident that the index accurately reflects the underlying market – which in turn confirms the relevance of using our swap as a tool risk management,” he said.
Initially, the project managers are not anticipating a “huge amount” of cash (commercial participation), but based on feedback to date, they are confident that it will increase over time.
“Some stakeholders have indicated that they are ready to intervene directly, while others may observe the evolution of the indicator before engaging,” Jude said.
Over time, several different indexes could emerge for different market segments, depending on where trade demand is going, Beef Central said.
Swaps program manager Tim Jude joined StoneX last year from Fulton Market Group, where he was responsible for beef sourcing for McDonald’s and others in the Australian and New Zealand domestic markets, as well as exports to Korea, Taiwan, Malaysia, UAE, Philippines and US. Prior to FMG, he worked at GrainCorp and Allied Pinnacle in the grain and flour industries. He has ten years of experience in commodity sourcing, hedging and risk management, including advising multinational food processing and manufacturing companies.
Click here to access a recorded webinar on the new Feeder Cattle Swaps product.
StoneX (some readers may remember the company by its former name INTL FCStone) is an international financial services network specializing in hedging tools such as futures and swaps on a range of agricultural commodities. It connects businesses, organizations, traders and investors to global markets through a combination of end-to-end digital platforms, clearing and execution services. Click here to access the StoneX website.