Cattle folks talk fall market details
September 14, 2016
More than 200 cattlemen and women gathered in Billings, Mont. on Sept. 9-10 for the United States Cattlemen's Association's (USCA) inaugural Cattle Producer's Forum. The event included a USCA business meeting, trade show, conservation workshop, and panelist discussions on topics including the next generation of beef producers, beef exports and global trade, the beef checkoff program, independent commercial livestock hauling updates, legislative updates and profitability tips for producers.
Of the many industry topics covered during the forum, perhaps the most highly anticipated panel discussions of the day was on the state of the current cattle markets. Given the nearly $60 billion loss in the last half of 2015, producers were at the edge of their seats during the session as the panelists explored their theories on why futures prices have become more volatile and disconnected to cash movement in the market place.
The session, appropriately named, "Cattle Markets in Peril," featured comments from Craig Morris, USDA Agricultural Marketing Services Livestock, Poultry and Seed Program deputy administrator; Dow McVean, McVean Trading & Investments managing partner; and Peter Haller, lobbyist and markets expert for IEX Group, Inc.
USCA executive vice president Jess Peterson expressed the group's intent to lobby for changes to beef price reporting, which would "ensure competition, transparency and true price discovery" in the marketplace.
“Measured discipline is important in starting any business. Even when times are good, you should still limit how far you push your business and expenditures.”David Cooper, editor of Progressive Cattleman
During the panel, Morris explained the upcoming changes to price reporting, which will take place this fall. Mandatory price reporting currently covers live cattle, hogs and sheep, beef meat, pork meat, sheep meat and imported sheep meat, but a voluntary reporting system will also include feeder calves, grain, hay, feedstuffs, auctions, bio-energy, tallow, hides, offal, wool, rice, beans and bison, he said.
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The voluntary reporting will cover nearly 200 cattle auctions in 31 states and allows for discretionary reporting to give producers a better idea of current values for the sales and purchases they are making. Morris told the group of ranchers, "This could really help producers understand the value of their products."
In addition to Morris' comments, McVean and Haller shared their skepticism about the integrity and power of expanding meatpacking companies and the Chicago Mercantile Exchange (CME).
"Anyone who has been in this market for very long knows that there is something terribly wrong," said McVean. "When you have a washout in the futures market, eventually lower feeder cattle prices, lower cull cow prices, lower calf prices will follow."
McVean suspects that the CME might be playing favorably to big investors, placing individual cattle ranchers and feeders in the loser's seat.
He told producers, "In the era of a for-profit CME, market integrity has been regulated to the back of the bus, and anything that will bring trade movement has been moved to the front of the bus. It's really damaging the $100 billion cattle industry. For those of us who have traded cattle for years, there are clearly things going on that are not normal and not human, quite frankly. It's very difficult to prove, but if the cattle market goes down, then it goes down again, then it goes down some more, but the commitment of traders never changes, that's not normal."
Haller echoed McVean's sentiments and zeroed in on the packer, warning producers of their growing power, and he shared his concerns about the current state of the cattle market.
"The problem that I see in the cattle market is that it appears to suffer from information leakage," he said. "As a result, the trades are compromised before they are completed. Producers enter into formula contracts, which basically tells your counterpart literally everything they need to know. Your counterpart in these contracts is not your friend. Don't trust them. Read the contract, and fight them on every provision."
Haller explained that when a producer enters into a contract and tells the packer that he will be delivering X number of head of cattle on a specific date that the packer then has the information they need to manipulate the markets.
With the information they gain from these contracts, he said, "They no longer need to go to the spot market, so they are not legally required to step out or stand away from the futures market at times when a settlement is coming up. The problem you face is they are potentially trading against you in the futures market at the exact same time you are settling on a futures prices."
He added, "Why would the packers aggressively compete against each other when it would hurt their reference point on other contracts? Their life gets easier every single time someone converts. I know a lot of you converted. You're strongly incentivized to go contract, go formula and not keep anything on the spot market."
McVean added, "The packers have so much captive supply that they are able to manage the flow of supply to slaughter."
Haller urged producers to rally together and put up a good fight against the packers.
"You are the good people in this fight," he said. "If they are exhibiting anti-competitive market power by not participating in the spot market to the extent they do in the futures market, you have a real market power problem. Go to regulators. Make your concerns heard. Fight to bring price discovery back to the spot market. The industry needs a small but powerful victory right now."
He suggested that producers focus on a single element, such as bringing 20 percent of contracts back to the spot market, and lobby to Congress, talk to the media and build a good story for change to happen.
Haller said it's a true David and Goliath scenario, but he told producers, "If you focus, line up the merits of your market, focus on the key element, and you win, it's the way to efficiently get what you want."
Jess Peterson, USCA executive vice president, urged producers in attendance to gear up for a long battle ahead. He said, "The biggest threat to our industry isn't the misguided consumer; it's the fighting amongst ourselves in the cattle industry. If we don't unite to fight together, we're in for some serious trouble down the road."
USCA isn't the only cattlemen's group taking note of the alarming situation in the cattle markets. Recently, R-CALF USA CEO Bill Bullard criticized antitrust and competition enforcement agencies, who he says "have failed miserably to prevent multinational meatpackers from manipulating cattle prices and controlling the cattle and beef markets, resulting in financial harm to both cattle producers and beef consumers."
Bullard said, "Our cattle industry is in dire need of leadership from federal regulators to restore transparency in the cattle market and stop the abusive cattle procurement practices by the dominant meatpackers. Until that leadership emerges, the Commodity Futures Trading Commission should shut down the cattle futures market that is now being exploited by the dominant meatpackers with impunity."
Meanwhile, Colin Woodall, National Cattlemen's Beef Association senior vice president of government affairs, recently told Ohio Ag Net, "This volatility is absolutely killing our producers who are trying to use these tools to manage risk and we keep hearing from our members that because of the price swings, even the tool that's used for risk management is not as effective as it once was."
Earlier this year, NCBA put together a CME working group, and Woodall added, "CME has made it very clear to us that they want to fix these contracts and make sure that we are satisfied with the way these contracts work. The idea of taking these contracts and moving them someplace else may sound like a very good knee-jerk reaction, it's not an action that we want to see in this overall effort. That's why it's important that we continue to work with CME to find a true fix."
Despite the industry concerns from all three major cattlemen's organizations, Mark Dopp, North American Meat Institute senior vice president of regulatory and scientific affairs recently told Politico, a publication that covers agriculture and food policy issues, "The matter is that the cattle industry has been reviewed and analyzed and investigated for years, time and again, and there's never been a finding that they've ever manipulated any prices. So this is just a rinse and repeat of what they've been saying for years."