A Good WeekWritten by Dennis Sun
Published: 05 March 2016
The last week in January was a great week for the nation’s cattle industry. While the 2016 Cattle Industry Convention couldn’t fix the recent volatile prices in cattle, there was a whole lot of discussion on the issues and some corrective measures taken.
Some 6,700 cattlemen and cattlewomen and those involved in the cattle industry attended the National Cattlemen’s Beef Association’s (NCBA) convention in San Diego, Calif. The event also included some 340 trade show participants. If it was related to cattle, it was exposed in the trade show.
The main topic during the convention was the sudden drop in cattle prices and what should – or could – be done about it as the cattle feeders and beef buyers have really been hit hard by the major volatility in the futures markets. Cattle feeders and others in the industry across the nation have lost an unbelievable amount of equity lately. This in turn has hurt cow/calf ranchers in the hills and those who buy yearlings to summer. But it is the cattle feeders who have really been bleeding lately, which, in turn, has hurt the whole industry.
We all realize that the record high cattle prices in 2014 and the first months of 2015 were caused by really tight cattle supplies and tighter supplies due to diseases in the chicken and pork industry. CattleFax analysts say it was the “perfect storm” in 2013 and 2014 that created an increase in prices, with a classic expansion cattle cycle phase, strong exports, strong demand and tight competing meats for protein sources that are being sought by the world’s growing middle classes. They also say it was a “perfect storm” that caused the downturn in prices, with a soft export market caused by a stronger American dollar and an increase in beef and other meat imports.
Some point their finger at the meat packers and have asked for an official investigation by the U.S. Senate Judiciary Committee to look into potential anti-trust and anti-competitive conduct in the U.S. beef and cattle markets. I didn’t hear much about that issue in San Diego as much as I did hear about the high frequency trading’s impacts to the volatility. These high frequency trades take place in a split second and only benefit the hedge funders.
As I understand it, most of the other commodities have eliminated these split-second trades, delaying trades by at least one second. That’s what needs to be done with cattle. High-frequency traders are using computers to make a profit from price movements caused by large institutional trades buying as when prices are down and selling in a few minutes later for a profit. These split-second trades happen just too fast, and no one can keep track. The one second delay slows down the process so everyone sees the market at the same speed. I’m not sure that I understand it all, but that is what we are hearing.
NCBA is working with the Chicago Mercantile Exchange (CME) by asking for the audit trail data as part of their investigation into the wild swings of the cattle trades. They have already made some improvements in trading by putting a limit on the number of times an individual firm can trade, which will help.
We hope everything that everyone is doing will help. Stability in the cattle markets is the best answer, and we hope that the world’s issues will not hinder it either.