R-CALF USA: CME’s action unlocked stalled feeder cattle futures market
December 19, 2014
Group will seek investigation
Billings, Mont. – Yesterday the Chicago Mercantile Exchange Inc., (CME) took emergency action to unlock the stalled feeder cattle futures market that had been locked the limit down for an unprecedented five consecutive days. In response to the lockdown, cash feeder cattle prices fell approximately $15 per hundredweight, or about $120 per head for an 800 lb. steer, in just two weeks.
According to Bob Mack, R-CALF USA's representative on the Commodity Futures Trading Commission (CFTC) Advisory Committee, the lockdown may have been caused by panic selling.
"The CME took appropriate action by widening the trading range to allow prices to find market clearing levels in an orderly manner," said Mack.
The feeder cattle futures lockdown followed about a $10 per hundredweight decline in fed cattle prices and a weakening of beef prices. Other factors in play prior to the lockdown include an increase in corn prices, negative feeding margins, a continued strengthening of the dollar and financial instability around the world resulting from a steep reduction in crude oil prices.
Some industry analysts believe it was these factors that caused the unprecedented lockdown in the cattle futures market.
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Mack does not disagree that these may be contributing factors, but he said that given how thinly traded the feeder cattle futures market is, and because the market is cleared by cash rather than by delivery of the actual commodity, the feeder cattle futures market is vulnerable to manipulation.
"It is essential that the CME and the CFTC look at the trading activity around this market move to verify that it is due to legitimate market signals and not the result of market manipulation," said Mack.
R-CALF USA CEO Bill Bullard said his group called the CME on Wednesday and urged them to take action to unlock the market, including action typically used to break a market squeeze given the group's concern that this lockdown may have been caused by manipulation.
"Our U.S. cattle herd size is the smallest in about 70 years making cattle supplies extremely tight while demand appears to be strengthening. These factors contradict the severe market correction we just experienced and fuel our concerns of market manipulation," Bullard said.
Trading in the feeder cattle futures market resumed yesterday so producers are once again able to hedge their feeder cattle risks.
"Time will soon tell if these actions are enough to prevent further market collapse. Meanwhile, we will be asking the CME and the CFTC to investigate the cause of the unprecedented, five-day market lockdown to determine if our suspicions of market manipulation are correct," Bullard concluded.