Mar 9, 2012

Futures folly

Futures folly

You love them when they’re long and then you hate them when they short the market. Big money funds can swing a lot of dollars around in commodities futures trading, and with live cattle and feeder cattle contracts that typically have low trading volume, it makes it that much easier to swing the market when just a few big contract holders make erratic trades in the markets.

Gasoline and oil prices have been moving much higher and the talk of large speculative trading in oil is starting to hammer consumers again and changing their spending habits. Politicians are taking hold of the populous dialog about commodity speculators bidding up oil prices beyond the fundamental supply and demand market indicators would justify.

Financial markets, in general, were having a rough time last week and some of the negative dialog spilled over into cattle futures. Cattle markets had a rough time and market analysts have been expecting some kind of correction soon. Monday morning, last week, the fragile live cattle market came tumbling down, with the April contract dropping $5 over the first three days of the week.

We could say that outside markets were the culprit. European economic issues raised their ugly head again and the broad markets were on the sell. Open interest on live cattle dropped like a rock, which tells me that the managed money funds were pulling out and the big short was the call of the day. We’ve known for some time that the funds were the long money in the cattle markets and anyone who spends any time with the markets knew it was a matter of “when” the markets would go short, not “if.”

The big loss in futures markets motivated cattle feeders to sell cattle, realizing the negative trend was set for the week and the chance of a rebound to support a higher cash market was unlikely.

Feeders let cattle go at $127 Tuesday and turned into price takers for the balance of the week, trading at $126 and some heifers at $125.50. Feeders sold lots of cattle on the cash market. Hopefully, they sold enough cattle to maintain show lists at manageable levels. Packers processed an additional 11,000 head last week.

When speculators sell the market, it doesn’t seem that they can get through the door fast enough. We love the speculators when they are building the market and hate them when they are tearing it down. Consumers have been resisting high beef prices and have plenty of protein choices to choose from. The live cattle market was forced to move lower to clear an expanding inventory of market-ready cattle. However, the beef cutout was able to maintain the high end of the trading spectrum, which will improve packer margins. However, it is unlikely that wholesale meat buyers will allow packers to hang on to a positive margin for long.

There has been a lot of news coming out of the Commodities Futures Trading Commission (CFTC) over the past few months regarding fraud. Aside from the many new regulations they have been required to produce, they have been very busy on enforcement. Just over the past month, they have reported at least 12 cases involving fraud in futures trading schemes, many more than we’ve ever seen before.

The MF Global Capital case was certainly one of the biggest issues facing the Commodities Futures Exchange in history. CME has been pretty good staying out of the news until recently and there is no question that the financial situation created in 2008 has motivated CFTC to do more investigating in futures trading. CFTC is the watchdog for CME and other futures market exchanges.

Remember the old movies portraying CME as the big money boys’ club? Those images may be true after all. Markets will go up and go down; we all know that, but futures markets sure seem to expedite the markets’ mood. The number of fraud cases that have been investigated is a little disconcerting. I’m not saying that CME is guilty of anything, but there sure seems to be a lot of smoke coming out of Chicago. It would be a sad day if we lose confidence in futures trading because it’s a valuable tool to manage your market risk, which there is a lot of these days. — PETE CROW