CME trading, antitrust activity could have caused market swings
January 22, 2016
One national cattle group is talking with the Chicago Mercantile Exchange to learn more about how lightning-fast electronic trading – the buying and selling of cattle "on paper" might affect the value of real, live feeder calves.
Another national cattle group asked a senate committee to investigate possible antitrust behavior.
On November 14, 2014, 74 head of 609 pound black and baldy steers fetched $2.71 per pound at St. Onge Livestock in St. Onge, South Dakota. Every week brought new record prices that year, with a few 600-weight steers breaking the $3 per pound mark. A year later, that same ranch sold 32 black and red steers weighing 603 pounds. Those calves were worth $1.95 per pound.
Every rancher in the country is asking the neighbor, the mailman and the border collie, "What is going on with the market?"
Justin Tupper, St. Onge Livestock manager, said the swings are caused by more than the usual market signals. "There is no basis, there is no supply and demand controlling it. Yesterday we were up two dollars, and now we're down four today. There is no way we should have a six dollar swing in one day."
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Don Close, Rabo AgriFinance Protein Analyst, said the 2014 record high market was driven by tight supplies, caused by the 2011 drought. Additionally, he blamed the bird flu and porcine epidemic diarrhea in the swine industry. "We had all waited so long for that rally, that when it occurred we wanted to believe it was the dynamics of short supply of beef that drove it. In hindsight, it was also driven by short supplies of those competitive proteins as well," he said.
A "perfect storm" in 2013 and 2014 is what forced the market up to record highs, said Ethan Oberst an analyst with CattleFax. "It was the classic expansion cattle cycle phase. Strong demand, tight competing meats, strong exports," all contributed to the upswing.
And another "perfect storm" has applied intense down pressure on the market in recent months, he said. A softening of the export market caused by a stronger U.S. dollar, demand that has moved toward "long term support levels," and an increase in imports have all contributed to the market drop.
Despite an optimistic feeling throughout the industry in 2014, it was hard to predict what the global economy would do. "Looking back, it's not a surprise that we did what we did. Yes, it was one of the most extreme moves we've seen. We've transitioned to a different period in the cattle cycle," Oberst said.
But R-CALF USA CEO Bill Bullard doesn't buy it. And Ed Greiman isn't so sure either.
Ed Greiman, chairman of the National Cattlemens Beef Association Cattle Marketing and International Trade committee, said the calves he bought on the record high market during the fall of 2014 made him money. The market held long enough. One half of Greiman Brothers, a cow-calf and finishing operation that typically feeds about 2,500 calves per year, Greiman said that the next round of calves he bought, in the second half of 2015, have not worked out. "We are losing money right now. That's what's trickling down to the cow-calf sector."
Greiman, who, along with his brother, buys calves through the video market and through some South Dakota auction barns, added that he did feed cattle to heavier weights than normal in the latter part of 2015, in an effort to squeeze a few more dollars out of each animal.
R-CALF USA, on Jan. 5, 2016, asked for an official investigation by the Senate Judiciary Committee, into potential anti-trust and anti-competitive conduct in the U.S. beef and cattle markets.
The group asserts that at least three cattle procurement practices by the big four meatpackers caused feeders to put more pounds on cattle then necessary, further driving the market down. First, meatpackers can simply delay delivery of cattle under formula contracts. Second, they can pass over market -ready cattle and offer competitive bids on only "green" (unfinished) cattle, and third, they can buy market-ready cattle on the condition that the feeder not deliver the cattle for two to four weeks or more, said R-CALF USA.
NCBA's concerns are on the trading side of things. Greiman penned a letter Jan. 13, to the CME Group Executive Chairman and President, Terrance A. Duffy, explaining that NCBA members have voiced concern over market volatility and high frequency trading's contribution to that volatility.
"We are not to the point of accusing the CME of doing anything wrong. We're wanting to work together and figure out how these high speed guys are affecting our market," Greiman said.
"High frequency traders," according to Forbes magazine, use computers to "try to profit from the price movements caused by large institutional trades." The magazine article goes on to explain, "HFTs buy on the dip, hoping to be able to sell the shares a few minutes later at the normal price," saying the activity is secretive and mysterious but not "evil," and that it can serve to level out the bumps and dips in the market.
Greiman and his committee said the split-second actions happen too fast.
"High frequency trading occurs at a rate faster than any human can analyze." They called for a one-second delay between trade actions in order to level the playing field so that everyone sees the market at the same speed.
"In order to better analyze and understand market action, the CME Group must release audit trail data for analysis that includes firm-level generic identification. This would be utilized by industry and researchers to better understand trading behavior which could possibly be damaging," said Greiman and NCBA's president in the CME Group letter.
They also said that CME Group "has to more actively engage in monitoring and acting upon violations or market manipulation," and that it should be vocal in reporting such actions.
According to R-CALF USA, the USDA Economic Research Service projected about a year ago that the fed cattle market would continue to rise, and by 2017 would be $10 per cwt higher than it had been in 2014. Then USDA had expected a gradual five- year decline, amounting to about $2.51 per cwt per year, beginning in 2018.
Experts, including a Kansas State economist and CattleFax analyst, agreed that 2015 prices could be expected to be as strong as or stronger than 2014 prices, said the R-CALF USA letter.
In correlation with Greiman's on-the-ground experience, R-CALF USA says it was in the second half of 2015 that the market began to tumble. They told the committee of a $41.35 per cwt price drop, or a loss of about $516.88 per head on 1,250 pound steers, between the first and second half of 2015. According to R-CALF USA, the producers' share of the consumer beef dollar dropped from 58.2 percent to 45.3 percent between November of 2014 and November of 2015.
Other participants within the beef supply chain are capturing a significant share of the consumers' beef dollar that a competitive market should…allocate to the producer. R-CALF USA says this is evidence of antitrust and anticompetitive behavior by the nation's four largest meatpackers.
Additionally the meatpackers' conduct of dividing, if not assigning, cattle procurement territories and depriving some territories of any buyers should be investigated.
Greiman talked about this activity – or lack of, citing the small number of cash bids for finished cattle in the south. "We saw it at its worst at the end of the year – the lack of cash trades." In the beginning of 2016, up to 20,000 head of Kansas cattle per week were sold on the cash market, he said, compared to less than 5,000 per week the last few weeks of the year.
"I don't think it's just the packer – the feedyards were also asking for formula pricing," he said.
R-CALF USA hopes the committee will direct the Department of Justice to initiate enforcement action to halt all antitrust and anticompetive practices and introduce legislation to restore competition in areas where antitrust laws are silent, said R-CALF USA's Bullard.
The widening spread between retail beef prices and feeder calf prices has not escaped Tupper's attention. "They are still charging almost the same for a ribeye as when the market was at the high. Somebody's making a boatload between when it got killed and when it gets to the consumer."
Close doesn't argue. "I would agree that beef prices aren't dropping as fast as cattle prices." It could be that the retailers are waiting to see if the lower market is permanent, retailers might be trying to make up for lost ground after a tough 2014 – "they couldn't raise counter prices and preserve customer cooperation at a rate as fast as they needed to,"- or it could be plain old greed. "It is a free market," Close says.
What is ahead?
Tupper said his expectations for the 2016 market vary from day to day. Heavier fat cattle have added to market woes, he said, but those should be getting worked out of the system. "If we were in a true market where weather was a factor, we should have a good fat cattle market here for the first quarter but it might not be market driven again." Greiman also said the fat cattle market could rally in April, depending on finished cattle weights. But then he worries that the global economy will keep downward pressure on the market.
We are still in an expansion phase, Tupper and Oberst said, and an upturn is not necessarily expected.
Green calves headed to summer grass should be a relatively valuable commodity in the next few months, said Oberst.
Close said monthly average placements have averaged down the last six months, which indicates that the number of feeder calves outside of feedyards is big. And that the available supply of fed cattle for the first half of 2016 will be tight. "So sooner or later this growing supply of cattle outside of feedyards is going to make its way to the market. That will lead to a larger beef supply somewhere during the second half of 2016."
The market "feels better now," said Greiman. "There is more bid and ask going on." But with other commodities down, he's not sure.
"If oil keeps dropping, the stock market keeps dropping, cattle might not rally," he said.
"All of a sudden we're tied to things we've never been worried about in the past."
CME Group Executive Chairman and President Terry Duffy will speak to NCBA's Cattle Marketing and International Trade Committee during their convention this week.