An extended government shutdown will introduce inefficiencies in the agricultural commodity price discovery mechanism. Sketchy data on cash market prices will diminish market transparency. Futures traders will have more difficulty getting reality checks from cash market transactions.
Producers will still be able to enter futures and options positions to hedge. However, lack of or limited cash market data will make it more difficult to pick opportune times to offset such positions. That same lack of broad based cash market information will make it more difficult for producers to ascertain whether they are getting fair value for their products in their local markets.
Normal basis relationships may not hold. Depending on which market forces cash participants are watching, basis could be stronger or weaker than normal. It would seem more likely that uncertainty would drive cash prices lower. Either way, producers will have to rethink their price risk management programs.
Grain issues are not so complex. Grain futures contracts that are settled by delivery are a lesser concern than those livestock futures contracts that are cash settled against a cash price index.
Threat of delivery on grain contracts should still cause convergence. That is cash and futures prices come together and become one as the contract expires. Why? If futures are too high, relative to cash prices, when the contract becomes deliverable, participants will sell futures and buy cash grain to deliver on the contract. Selling futures depresses futures prices. Buying cash grain boosts the cash price. Together those actions close the gap. If futures are too low relative to cash prices, participants will buy futures and sell cash, which also closes the gap.
Threat of delivery should also force convergence in some livestock futures contracts, such as fed cattle, that also have a delivery mechanism for settlement. Fed cattle delivery points are scattered across the country. Sketchy cash prices data will make it more challenging for producers to decide whether to deliver or offset their futures positions.
Limited information on cash market prices will fuel debate on whether futures are converging on the "right" cash price. Sketchy information on cash prices could result in abnormal basis relationships at locations other than those prescribed in the fed cattle delivery mechanism.
Cash settlement issues are more complex. Lean hog futures settle against a two-day moving average index price calculated based on cash prices gathered nationally by USDA's Ag Marketing Service, Market News Service.
Feeder cattle settle against the feeder cattle index, which is based on a seven-day moving weighted average of 650 to 849 lb Federal-State reported feeder steer sales throughout the high producing central 12 state area.
The shut down means MNS is not collecting and compiling the cash price data needed to drive those indexes. Lack of USDA data could disrupt the October 2013 contracts for live cattle, lean hogs and feeder cattle futures and options.
If the shut down does not end in time for MNS to compile enough cash market data to drive those indexes, the CME will have to work out some alternative contract settlement mechanism.
Limited alternative price data are available. For years CattleFAX has provided price information to its members compiled from data members report on fed and feeder cattle. However, data on local feeder and stocker cattle prices are scarce. Even less information is available on hogs.
Index deadlines loom. October lean hogs expire Oct. 15. The shutdown needs to end by the end of next week in order for USDA to gather two day's worth of cash prices to drive the lean hog index. And that assumes gearing data collection back up goes without a hitch.
Although feeder cattle futures drive off a seven-day index, feeder cattle will not be first to feel the squeeze. Feeder cattle futures typically expire the last Thursday of the contract month. This year's last trading day is Oct. 31.Back up seven trading days from there gets you to Oct. 22. The shut down needs to end by then in order form MNS to gather enough feeder cattle price data to drive the index.
Earlier Tuesday the CME said the shutdown also could affect certain dairy futures and options. But later the CME said it had learned that the federal rule-making body overseeing purchases from dairy farmers would release prices Wednesday, in time for the affected product contracts to settle as scheduled.
Value of futures as a price discovery tool could also diminish to due thinning volume.
"What do you do when the data are unknown?" poses Michael Cordonnier, president of Soybean & Corn Advisor, a Hinsdale, Ill., agricultural consulting firm. "You sit on the sidelines."