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USCA conference: Frustration grows over cattle futures

Progressive Cattleman Editor David Cooper Published on 22 September 2016
Craig Morris speaking at the USCA conference

A trio of speakers at the U.S. Cattlemen’s Association Producer's Forum took aim at one of the key questions plaguing the cattle industry over the past 12 months. Namely, why is the futures market in such disarray?

Their verdict sounded alarms about possible anticompetitive power used by packers, broken markets and the need for true price discovery in cattle trading.

Speaking at the Sept. 10 conference in Billings, Montana, Craig Morris, deputy administrator for USDA’s Agricultural Marketing Service, explained how mandatory price reporting fell out of the 2015 agriculture reauthorization bill when beef industry parties couldn’t reach consensus.

“At the end of the day, the beef packers – the ones who have the data – they did not support the proposals,” Morris said.

Mandatory price reporting is where the packer or processor is required to reveal prices paid for livestock, and provides price and supply data to all segments of the industry.

That opportunity to renegotiate mandatory price reporting will return in March 2018, Morris said, as negotiated rule-making begins with all beef, poultry and pork industries’ members, in meetings with federal negotiators. If Congress can get a package from the industry that has consensus, reauthorization can move quickly, Morris said.

“We know there are real problems in the cattle industry,” Morris added. “Mandatory price reporting can really help, at least provide transparency to some of the issues. The only way we’re going to get changes is if we all work together.”

Seeking answers

But that price discovery is needed now, according to the other speakers at the session titled “Cattle Markets in Peril,” which burrowed further into the heavy losses seen in the cattle industry since fall of 2015.

Dow McVean, a managing partner with McVean Trading & Investments, said the correlation between cash and futures markets could no longer be charted under traditional norms.

“Clearly there are things going on that are not normal and not human,” he said. “Markets don’t just go up and down. They go up and down because someone is buying and selling. You can go back, put it all together and see what happened.”

Typically when the cash market rises, it sparks suspicions in the futures market that those prices won’t hold. The opposite occurs when cash markets drop, and futures doubt the ability of prices to stay low.

“The higher cash gets, the bigger the discounts to the futures,” McVean explained. “The lower the cash gets, then the futures move to a premium. Then we have 2016. Something’s not right with this market.”

McVean said the industry is “caught up between the NCBA Marketing Committee that has managed policy on behalf of the industry, with regards to the CME, in a manner such that they’ve only been looking out for the less than 10 percent of the broader cattle industry that is the short commercial hedger.”

“They’ve thrown the rest of the industry under the bus in the name of having a favorable basis at the end of the future’s contract,” he said.

Dow McVean speaking at the USCA conference

Market integrity

McVean added that the for-profit, publicly traded Chicago Mercantile Index (CME) is primarily focused on its own stock price, which is driven by trading volume. “In the era of a for-profit CME, market integrity has been relegated to the very back of the bus, and anything that will drive trading volume has been moved to the very front of the bus,” he said.

Futures contract specifications, McVean said, have been degraded over a decade at the request of the NCBA, and granted by the CME.

“It is absurd to have the same rules of engagement for high-frequency traders in the cattle market that you do in the S&P,” he said. “This broken, messed up futures contract and marketplace is having a huge effect on the underlying cattle industry, and it’s time for the adults to stand up and do something about it.”

A dangerous scenario

Peter Haller, a lobbyist and attorney for IEX Group Inc. who specializes in market analysis, said the proliferation of high-speed trading has set up a dangerous scenario for commodities like cattle.

“The problem that I see in your market is that you suffer information leakage,” Haller said. “[Producers’] trades are compromised before they’re completed. You enter into formula contracts and you’re basically telling your counter party – who legally is not a broker. They are not your friend. They are your counter party. They should be treated at arm’s length. Don’t trust them. Read the contract. And fight them on every provision.”

To further explain, Haller said when a producer enters a contract to sell a set number of cattle by a certain date, the buying packer then has the information needed to avoid the spot market. He said they are not legally required to “step out or stand away” from the futures market when a settlement is coming up.

“The problem is they’re potentially trading against you in the futures market at the exact time you’re setting a reference price,” he said. “They’re potentially changing their behavior in the spot market, because why would they aggressively bid up or compete with the other meat packer to buy cattle at spot market when it would hurt their reference price on much larger contracts?”

Haller added, “The more people they shift to reference contracts, the less investment they have to make in messing around with the spot market, so their life grows easier every time someone converts.”

Illuminating the issue

According to Haller, cattle producers do have some hope in fighting the “anticompetitive market power” if they target an angle that illuminates the issue with optical advantages in the mainstream press, namely that “formula contracts are an all-or-nothing decision for some of you.”

He suggested making concerns heard with the right regulators and the press. One hook would be to make some percentage of contracts go back to the spot market – as little as 20 percent – then some level of price discovery would return to the markets.

In response, the American Meat Institute (AMI) told the news website Politico after the conference that McVean’s allegations ring hollow about collusion on prices.

“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,” said Mark Dopp, AMI’s senior vice president of regulatory and scientific affairs. “So this is just a rinse and repeat of what they’ve been saying for years.”  end mark

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PHOTO 1: Craig Morris talks about mandatory price reporting at the U.S. Cattlemen's Association conference.

PHOTO 2: Dow McVean speaks to attendees at the U.S. Cattlemen's Association conference about the unstable cattle market. Photos by David Cooper.