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Introduction

The proposed futures contract will be traded on FutureCom, a new futures and options exchange. The proposed contracts will be traded electronically via the Internet. This memorandum addresses the conformity of the proposed contracts with the requirements of the Commodity Exchange Act as well as the Commission�s Regulations and policies, including Guideline No. 1. The Division of Trading and Markets has prepared a separate memorandum to the Commission concerning its recommendations regarding approval of the Exchange�s proposed rules of governance and operations.

The Exchange submitted its applications for designation in live cattle futures and option contracts on January 17, 1997. The statutory one-year review period has been stayed three times, so that the one-year review period now ends on May 8, 2000.1

Cash Market Overview

The proposed futures contract will be cash settled based on USDA-reported cash prices for sales of live steers and heifers intended for slaughter. These prices reflect transactions between feedlot operators and packers involving cattle that are commonly referred to as "fed" or "slaughter" cattle.

The primary cattle feeding states are Colorado, Kansas, Nebraska, Oklahoma and Texas. Data published by the U.S. Department of Agriculture (USDA) indicates that these states accounted for more than 65 percent of all cattle in U.S. feedlots on January 1, 1999 and in excess of 83 percent of all U.S. fed cattle marketed from feedlots having an annual capacity of 1,000 or more cattle during 1998. These states also accounted for about 66 percent of total number of cattle commercially slaughtered in the U.S during 1998. In recent years, between 640,000 and 715,000 cattle have been slaughtered per week on average in the U.S.

The Slaughter Cattle Production Process

The production of beef cattle consists of three growth stages. The first stage is the seven to ten month cow-calf stage, which begins with the birth of the calf and ends when the calf�s owner (cow-calf operator) weans it from the mother cow. The second stage of production commonly is the stocker cattle stage - the period when weaned calves purchased from cow-calf operators consume forage from pastureland to increase muscle mass rather than fat. Stocker cattle commonly are sold to feedlot operators after they have attained a weight of about 700 to 800 pounds. At this point, the cattle enter the third stage of production, the feeder cattle stage, in which the animals are fattened for slaughter. In this stage, the cattle are fed concentrated diets of corn and other feed grains until they attain slaughter weight (about 1,100 to 1,300 pounds).

Upon reaching slaughter weight, fed cattle are sold to packers for slaughter, frequently through packer buyers, who buy for individual packers, or order buyers who purchase for more than one packer. While most fed cattle are produced and marketed by independently owned and operated feedlot firms, some fed cattle are produced by packers. Packer-owned cattle may be fed on contract at the facilities of independently owned feedlot operators or in feedlot facilities owned and operated by packers. Fed cattle generally are slaughtered near the feedlots where they are grown to market weight. Fed cattle typically are sold to packing plants located near the feedlots in order to minimize transportation costs as well as weight loss and potential injuries to the cattle. Typically, these cattle are between 1� and 2 years old.

Market Structure

The primary cash market participants are feedlot operators and cattle packing firms. Most cash market transactions are executed on a spot basis, calling for delivery of the fed cattle to packers within several days. Some fed cattle are sold under forward contracts or other marketing arrangements.

USDA data indicate that there are more than 2,000 feedlots with a capacity of at least 1,000 head of cattle, and over 100,000 feedlots with a capacity of less than 1,000 head of cattle operating in the United States. The latest available information indicates that the 25 largest cattle feeding firms operated 99 feedlots in 1996, with a combined capacity of about four million head. These 25 firms are estimated to have accounted for about 37 percent of all fed cattle marketed in the U.S. in 1995.

According to data reported by USDA�s Packers and Stockyards Administration, there are approximately 800 federally inspected2 cattle slaughter plants in the U.S. These plants slaughtered a total of over 34.6 million head in 1998. Fourteen plants, each of which slaughters more than one million head per year, accounted for approximately 50 percent of all cattle slaughtered in the U.S. The latest available information from USDA indicates that the largest four cattle packing firms accounted for about 80 percent of all steers and heifers slaughtered at federally inspected plants in the U.S during 1998. These four firms operated 25 plants in 1997.

Slaughter cattle are generally sold in truckload units of about 40,000 pounds. A typical truckload of slaughter cattle contains about 33 to 35 animals, each weighing over 1,100 pounds. Slaughter cattle generally are sold by the hundredweight (cwt.). Transaction prices are in terms of dollars, cents and fractions of a cent per hundredweight.

Existing Futures Markets and Available Cash Price Information

Currently, live cattle futures contracts are actively traded on the Chicago Mercantile Exchange and the MidAmerica Commodity Exchange. Unlike the proposed futures contract, these existing futures contracts call for the physical delivery of live cattle.

Price information regarding sales of slaughter cattle are published by the Agricultural Marketing Service of the USDA (USDA-AMS). The 5 Area Daily Weighted Average Report, the price series to be used to calculate the cash settlement price for the proposed futures contract, is published by USDA-AMS.

Terms and Conditions of the Proposed Futures Contract