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On September 30, 2015, the negotiated formula purchase type was created when the Livestock Mandatory Reporting program was reauthorized. Commencing on Wednesday, October 12, 2016, the United States Department of Agriculture, Agricultural Marketing Service (AMS) LM_HG201 “National Daily Direct Hog Prior Day Report” will include the negotiated formula purchases.
As a result, CME will concurrently incorporate negotiated formula purchases into the final settlement calculation methodology for all listed months of the Contract and commencing with the October 2016 contract month and beyond.
CME announcement last week that it would change the settlement procedure for hogs. First, it may be useful to review the changes in the hog report authorized in the 2015 rea uthorization of the Livestock Mandatory Reporting (LMR). The changes were meant to provide a bit more detail as to the way in which hogs are marketed and thus i ncrease transparency, especially since the overwhelming majority of hog s in the US now are traded on some sort of formula basis. The second point is a re view of some shifts that appear to have taken place this summer and the reasons for such changes.
LMR changes per reauthorization : On September 30, 2015 Congress reauthorised the Livestock Mandatory Reporting for another five years but it also added two additional provisions. Packers are now required to report on “negotiated formula purchases”.
According to USDA/AMS: “the term ‘negotiated formula purchase’ means a swine or pork market formula purchase under which— (a) the formula is determined by negotiation on a lot‐by‐lot basis; and (b) the swine are scheduled for delivery to the packer not later than 14 days after the date on which the formula is negotiated and swine are committed to the packer.’’
These would typically be non‐written or verbal agreements to price a lot of swine based off of an AMS report instead of the negotiated base price.”
USDA price reports, including LM_HG201 used to calculate the cash hog index, now will have two additional price buckets (for producer and packer negotiated formula hogs). As before, all the prices are rolled into a weighted average price. The CME notice reflects the changes in the USDA report.
The reference cash price still is a weighted average number. The hogs reported in the new buckets were previously included in the formulated category. Now market participants will be able to see the magnitude of this marketing channel but it should not impact the weighted average result.
The other change included in the LMR reauthorisation was the requirement that packers will report the price of hogs purchased after the reporting cutoff time will now be included in the morning and afternoon report of the following day.
As AMS notes in their analysis, “this change will increase the volume of hogs reported in the daily morning & afternoon reports and reflect the afternoon‐to‐afternoon daily marketing cycle.” In our view this change has more of an impact on reported pricing since it has the potential to include more hogs in the mix.
Thursday September 8, 2016/ CME/ United States.
http://www.dailylivestockreport.com