Broken cattle market
June 7, 2016
Editor's note: Lynn sent this letter of concern to several state representatives.
I have been a commodity broker for the past 18 years and in the fed cattle business for the past 24 years. In all of those years I have witnessed many ups and downs in the cattle business. The past 10 months in the cattle business are unlike any of those years and something needs to be done sooner rather than later to help stop the extreme losses and eventual ruin of this industry at the farm level.
I am writing this letter in reference to the broken cattle market and extreme drop in cattle prices we have experienced since June of 2015. As you are well aware I'm sure, the CME went to an all electronic trading platform in June of 2015. With that, the open outcry in the futures and option pits for live cattle and feeder cattle were switched to an all electronic trading platform. The transparency to the cattle market also disappeared with this change. It is impossible for the average broker, trader, livestock hedger to have any idea who is placing orders, and where they may be coming from. There is now also a very large presence of high frequency trades, which are placed within micro seconds of the orders placed in the platform by ordinary traders. They are designed to skim the market and create volume and commission for the CME. The cattle industry cannot and will not be able to compete against this sort of volatility and price movement! How can the value of one fed steer drop $100 in value in less than a week's time when retail prices are steady? The CME livestock contracts were originally set up for price discovery in the livestock industry. They are now used for price manipulation and leading the market by large hedge funds and corporate entities!
Another issue very concerning to this industry is the failure of retail prices in the stores to follow the price declines experienced by ranchers and farmers. Back on May 28, 2015 the June Live Cattle contract posted a high for the summer at $147.97. Cash cattle prices that week were close to $154 per cwt live. Since that time the futures market has dropped in June Live Cattle 2016 to $114 and the cash cattle market currently at $123 per cwt live. That is a 27 percent drop in the futures market and a 22 percent drop in the fed steer market. Retail prices for beef on the shelf have dropped 3 percent. This not only raises eyebrows by the cattle feeder but what about the consumer? It has been nearly one year and beef prices are just starting to retreat ever so slightly. I asked the question at a meeting put on in Sioux Falls, South Dakota, to one of the major packer's top executives why this was occurring. His response was, "We feel we have the house wife trained at these price levels and feel uncomfortable dropping them at this time in case the live cattle were to rally sometime in the future."
What is the relationship between the major packers and the retail giants? It would be very interesting to see their influence on the futures markets! How many positions do they hold, what volume of selling and timing throughout the day and does there happen to be any correlation to one or several funds when they do press the futures market? How would we know without an open outcry and transparency? There have been many instances when there has been large scale selling as cash cattle markets are trying to establish. Since June of 2015 there has also been a lot of spread activity between Live Cattle and Live Hog spreads. As an integrator producing large numbers of hogs and chickens what is their role in those spread trades as retail beef remains priced record high? Another very interesting spread trade since June of 2015 is a live cattle spread of buying 2016 June Live Cattle and selling 2016 December Live Cattle. The December live cattle contract for 2016 was as much as $8/cwt under the 2016 June Live Cattle contract. The Dec Live Cattle have never been inverse or lower in this spread in 17 years. Interestingly enough as cash cattle prices are now at their seasonal spring highs those spreads are being unwound as traders buy Dec Live Cattle and sell June Live Cattle pressing the market lower. Once again it would be interesting to see, who is positioned in these spreads with record high retail beef?
There have been rumors of fresh beef being opened up for import from Brazil even though Brazil is well known for the presence of Foot and Mouth Disease. Why would the USDA allow this to happen when scientific research shows FMD prevalence there and risk closure of our export markets?
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The Packers and Stockyards have rules and regulations written into law to protect both the consumer and livestock producer from too big and too powerful resulting in unfair trade. Why are these laws not enforced?
There are many very frustrated and angry cattle producers who are seeking answers to these questions and deserve answers that are truthful and transparent. The billions of dollars lost this past year in this industry are neither just nor warranted by market fundamentals. I have a long list of clients and fellow cattlemen and women looking for guidance and help! I can provide a long list of names and phone numbers who want answers. Please help us get those answers and let us know how we can help!
Sioux Falls, South Dakota