KAY'S korner

Cattle Market & Farm Reports, Editorials
Nov 6, 2009
Cattle feeders and packers are learning how to live with market volatility of historic proportions. It wasn’t so many years ago that most commodity futures prices were only allowed to rise or fall by a maximum 150 points per trading session. Any moves up or down the limit in the futures market caused shockwaves throughout the cash markets for livestock and meat.
The Chicago Mercantile Exchange eventually doubled the limits, to 300 points. The daily limits on other agricultural contracts were doubled as well. Market participants gradually became accustomed to seeing large rallies and declines during trading sessions. But in the past two months, futures prices have traded up and then down in extremes never seen before.
The unprecedented volatility has buffeted the three futures markets that most impact cattle feeders, the feeder and live cattle markets, and the corn market. This has impacted the respective cash markets as well as the boxed beef market. Traders and analysts have no desire to see a reduction of the daily limits. They don’t blame them for the volatility. If there’s any culprit, it is the huge influx of outside money in the form of speculative commodity trading funds or pension funds.
The funds began investing more heavily in agricultural and other commodities about five years ago. In 2003, investment from commodity-linked index funds totaled $13 billion. Today, the figure stands at $260 billion. The funds initially provided the markets with much-needed liquidity. But their dominating presence in several agricultural commodity markets (as well as in the oil market) is now viewed with considerable alarm.
Various recommendations are being hotly debated as to how to curb the funds’ influence. What disturbs producers, who use the futures markets for risk management, is that the huge swings in futures prices have made it extremely difficult for them to participate. They can no longer confidently use the futures markets to offset risk. And they increasingly can’t afford the margin calls that the swings in futures prices demand.
Take corn futures for example. The June floods in the Corn Belt lit a fire under these prices. In just a few weeks, the March 2009 corn futures contract reached $8 per bushel. Part of the rally was justified, as concern about lost corn acres was real. But part was over-inflated speculative buying. Then the sun started shining, the floodwaters receded and positive reports started emerging about the state of the crop. By this past Monday, the March corn contract was back at $6.21 per bushel. The colossal run-up was a nightmare for cattle feeders trying to hedge their corn needs. Now they’re unclear how much corn to cover at the lower prices. Will prices go even lower, or will they skyrocket again if the crop gets into trouble anytime between now and harvest time?
Live cattle futures have been just as volatile, both each week and over the past three months. The October live cattle contract on May 1 closed at $103.52 per cwt. That’s what the market said fed cattle would bring in five months time (the average time that cattle spend on feed). On June 2, the contract closed at $107.42 and on June 27 at $112.40. It closed last Monday at $104.80. This volatility both reflected and helped cause a big rally in cash cattle prices and then a sharp decline.
Volatility has also made it difficult for packers to sell beef out front. As live cattle futures prices rose in June, packers raised their out-front beef prices to cover anticipated higher raw material costs. This in turn affected the cash wholesale beef market, and late June early July saw a huge contra-seasonal rally in prices. Then the bubble burst and wholesale beef prices tumbled as fast as they increased. This has made the complex business of buying and selling beef even more challenging. Given the huge beef price run-up and then decline, retail meat buyers have bought hand to mouth and relied more on pork and chicken than normal to attract consumers with special discount prices. Beef has been the loser, and the price volatility is partly to blame.
As reported elsewhere in WLJ, USDA last week released its interim final rule for mandatory country of origin labeling (MCOOL). A couple of aspects are worth noting. The first-year cost of implementation for beef will be $1.252 billion. That’s a cost the industry can ill-afford to absorb. Yet it might have to because consumers have shown no inclination to pay more for beef just because it has an origin label on it. The implementation of MCOOL on Sept. 30 couldn’t come at a worse time. Packers are trying to sell beef higher anyway to cover increased costs. Retail beef prices are expected to rise in the coming months just as consumers struggle with less disposable income. Consumers will increasingly make their meat choices based on price. Second, I calculate (from USDA’s numbers in the rule) that only one-third of U.S. beef production in 2008 will be subject to labeling. It seems MCOOL will add cost with little benefit to producers or consumers. — Steve Kay
(Steve Kay is editor/publisher of
Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA 94953; 707/765-1725. His monthly column appears exclusively in WLJ.)