Pushing the panic button

Apr 27, 2012

Any time you see the futures markets trade limit down, on all contracts, inside of an hour, you know something went wrong, very wrong. It doesn’t happen all that much but did last Tuesday morning when traders got news that a cow was found in California with Bovine Spongiform Encephalopathy (BSE) and then the panic sell was on. Never mind the facts, just unwind your contracts, and get out, or at least, that’s how traders behaved last week. When June went below $113, a well-advertised support level, the market went on autopilot and the shorts were on the run.


Wednesday, the futures picked up a little following the prior day’s damage, but not enough to make everyone whole. Ironically, the beef cutout values continued to gain value and the Choice cutout was at $190 by the end of the day and daily slaughter was picking up steam. And there was some light cash trade at $119. It appears that the rest of the beef industry ignored any of the futures market panic. By Thursday, packers had found positive margins again because of the rally in the boxed beef cutout.

I was a little more concerned how the story broke and when it broke, because it did do some unwarranted economic damage. USDA had done their testing Monday to confirm the case and was planning on holding a press conference late Tuesday afternoon. USDA had a plan on how to handle it and they were going to do it after the futures markets closed so traders wouldn’t panic. But the story broke during trading. We heard reports that someone close to the situation in California sent out a “Tweet” to somebody and off it went. It kind of reminds me of the old saying “loose lips sink ships.”

The beef industry and USDA did a stellar job managing the BSE story. After the lean finely textured beef (LFTB) story a couple weeks ago, one would assume that the beef industry would be thrown under the bus again. Major news media seemed to realize that there isn’t a big story here and went on to other issues.

The culprit was simply an older dairy cow that went down at the dairy and was sent to the renderer. USDA’s Animal and Plant Health Inspection Service did their random testing and she was picked. No dead stock can go into the food system, so it really wasn’t that big of a deal. But the tests confirmed that the cow did indeed have atypical BSE, the kind that we don’t really know how it occurs, but it wasn’t from feeding banned feed products. Every now and then, it just happens. But it’s important to point out that the inspection system does work the way it was intended.

The big concern was what would this do to beef exports? With past reactions from trading partners, the industry was nervous. Apparently all our trading partners understood the situation and had little reaction. Japan’s chief cabinet secretary, Osamu Fujimura, said Wednesday that the nation believes there is no need to take further steps against U.S. beef imports as the cow infected with the disease was older than 30 months. He also said the case is unlikely to affect Japan’s decision on whether to ease import restrictions on U.S. cattle. Japan has been considering easing rules that currently allow imports of only those cattle age 20 months or younger from the U.S., raising that cap to cattle 30 months or younger.

Korea officials said they will continue to allow beef imports from the U.S. but will step up their inspection efforts. However, two of Korea’s largest grocery chains did say they pulled U.S. beef product off their shelves. But that didn’t appear to be a long term situation. Many other beef trading partners also confirmed they would take no action.

It doesn’t appear that this episode of BSE will have any lasting effect on the beef markets and shows that USDA and the beef industry have done a great job managing this issue. The incidence of BSE is extremely small and it’s been almost 10 years since the first case in the U.S. At the end of the day, it’s a very small issue and of little concern. The feed ban imposed in 1997 was very effective in reducing BSE incidence by 99 percent worldwide.

But the way futures traders’ reacted shows just how hyper sensitive some have become in the markets. Charts don’t tell the whole story in the beef complex. The beef market has had a tremendous amount of price pressure in recent weeks since the LFTB issue and ideas of weak consumer demand because of economic issues. April live cattle went off the board last Friday and now we’re looking at a June contract which is trading around $113; let’s see how the cash markets react to that, especially when packers are seeing some positive margins. — PETE CROW