Looking into it: R-CALF USA asks feds to investigate trading activity
The Commodity Futures Trading Commission is composed of five individuals appointed by the President.
According to the official website, “The mission of the Commodity Futures Trading Commission (CFTC) is to foster open, transparent, competitive, and financially sound markets. By working to avoid systemic risk, the Commission aims to protect market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act (CEA).”
R-CALF USA asked the Commodity Futures Tradition Commission last week to look into multiple instances of anomalies in the relationship between the cattle futures, cash market and wholesale beef prices over recent years. The organization wants to find out if packers were trading on the Chicago Mercantile Exchange on the dates in question.
According to the group’s CEO, Bill Bullard, their members contacted the him last spring when the futures market acted exactly opposite of what market fundamentals suggested it should – crashing at a time when cash fed cattle prices and wholesale prices were on the rise.
“Something was suddenly and abruptly pulling the cattle futures down,” he said – adding that the unexpected downward movement of the futures market drug the cash market down with it.
“The marketing committee met and said ‘this isn’t the only time this has happened, we should go back five years and trace the cattle futures market and compare it to the other values – the cash cattle price and the wholesale values.’” Bullard said he charted each of those values on a daily basis starting in 2013 and found numerous instances where the cattle futures were falling while the other two were on the rise.
“It appeared that the cattle futures market led the cash cattle market in a downward spiral in those instances,” he said.
“So we filed a request for an investigation for all of the specific dates we found in the cattle futures market when it abruptly collapsed. We asked the CFTC to look at whether the packers or someone representing the packers was engaged in trading activities on those days.”
Bullard said the group told the CFTC in 2016 that it appeared the futures market had become thin enough – like the cash market itself – that it appeared dominant traders could move the market with a couple of hundred contracts.
“If they shorted the market, or sold their contracts in large volumes, then the cattle futures market would collapse – you’d have a selling spree. So we suspect the packers or their representatives were shorting the market to drive the price downward, sending a signal to everyone in the futures market that cattle prices are going down so they would unload.” This activity would pull down the cash market simultaneously.
Jim Fryer, who buys grain and trades futures for a large central Montana feedlot and serves as the Montana Stockgrowers Association representative on the National Cattlemen’s Beef Association Live Cattle Marketing Committee said he, too has seen a lot of market volatility in recent years.
“The NCBA Livestock Marketing Committee took issues to Washington, DC and the CFTC and the CME about market volatility recently,” he said. Fryer is not representing MSGA or NCBA for the purposes of this article.
The futures market moves both up and down dramatically within hours sometimes, Fryer said.
“The volatility is a major concern. It’s a concern we took to the CFTC and CME in October of 2015.” Fryer said he pointed out during the meeting with the CFTC and CME that he sometimes witnesses spoofing. According to Fryer, spoofing, or entering false orders is illegal. Fryer describes spoofing as “market participants entering orders they don’t intend to fill or execute.”
The CFTC and CME have increased enforcement of spoofing by more often penalizing the offenders
In his research, Bullard said he discovered that packer margins widened substantially following the December 2015 repeal of mandatory country of origin labeling.
The research revealed a change in the marketplace beginning with the date that COOL was repealed. “From that day forward, there was a fundamental shift in the marketplace,” Bullard said.
Packer margins from Jan. 1, 2013 until Dec. 21, 2015 (the date of the COOL repeal) averaged $146 per head. From the date of the COOL repeal until April of 2018, packer margins increased 84 percent to average $269 per head.
“While we were specifically looking at the cattle futures market, it now looks very certain that something has triggered the packers’ ability to leverage cattle prices down so that they can capture a greater share of the producers’ value of cattle, leaving them with record profit.”
But Fryer said the increase in packer profit margins is due to oversupply of protein as a whole – chicken, beef and pork. “We went from a shortage to a surplus” of meat, said Fryer, saying that domestic cattle numbers have not necessarily grown but the quantity of retail beef available for purchase has increased.
Bullard said that in 2013 and 2014, historically tight cattle supplies required the packers to compete for available product. “Even the breaks in the cattle futures market were not sufficient to overcome the competition.” Since 2015, market analysts have said that plentiful supplies of cattle are driving the price down, but Bullard believes that this added supply also gives the packers or their buyers the ability to work together rather than bidding against one another.
“We had record imports in 2014 and 2015. We believe a lot of those imports went into cold storage and when COOL was repealed, the packers could begin selling that stockpile and could place a USA label on it,” he said.
Fryer said he has seen massive fundamental shifts in the past five to six years, but without seeing the data he doesn’t know if he agrees with R-CALF’s assessment.
“We’ve lost packing capacity in Plainview, Texas, we’ve expanded capacity with Tyson, we went through an extreme shortage of beef in 2014 and a glut in 2016-2018,” he said. The price of crude oil diving from $120 per barrel to $25 per barrel cannot be overlooked either, he said.
Fryer hasn’t seen R-CALF’s data so he can’t comment on whether or not activity in the futures market was affecting the cash cattle market on the days in question, but he does believe that it creates volatility in the market.
R-CALF USA believes that COOL had restrained the packers’ ability to market substitute imported beef product for domestically-raised beef, keeping the cash cattle price strong. The loss of COOL and cattle futures trading were tools that packers used to cause the marketplace shift.
When Bullard recognized what he thought was a major change on the chart after December of 2015 versus before that date, he asked an economist with the Coalition for a Prosperous America to review the data. “He found that it was statistically significant. That means there was an outside force causing a change in the market place. The COOL repeal is most likely that outside source.”
The organization also submitted to the CFTC a 2011 study conducted by the University of Wisconsin that found that meatpackers are still forced to compete for cattle when short term supplies are tight – as evidenced by 2014 cattle prices, Bullard said.
“But when short term supplies are plentiful, the packer conduct shifts from competition to cooperation,” he said.