Suppressing Cattle Volatility

OMAHA (DTN) -- Cattle producers and their various member groups are pressing for changes to the cattle trade and futures markets to help cope with what they see as unprecedented market volatility.

Groups are passing resolutions encouraging members to hold more cash sales while others are planning meetings to press for changes in the futures markets.

Producers are struggling with the daily price swings in the cattle futures contracts. At the same time, the formula cattle sales between feeders and packers are increasingly relying on prices coming from a smaller pool of negotiated cash trades. The volatility and thinning price reporting are combining to put more stress on cattle producers as prices keep trending lower by the quarter.

Jeff Stolle, vice president of marketing for the Nebraska Cattlemen, said the formula and contract sales in the fed cattle market have been factors leading to increased market volatility. The limit up and down moves have become unprecedented in the past 18 months, Stolle said.

"The volatility has made it more difficult for people to run their businesses and it has also made it more difficult to manage risk," Stolle said.

The price volatility can't be attributed to any one factor, Stolle said, but cattle producers are being affected. The price swings in the country can translate into a $3- to $4-per-hundredweight loss in price just in the volatility of the price changes in a given day.

"All it takes is the market going from being up $2 to being down $2, and we have seen that happen a number of times intraday here over the last few months," Stolle said. "It becomes a challenging environment to try to do business in."

Stolle noted such pricing issues become exacerbated for livestock producers dealing with poor rural cellular and internet connections. The longer it takes to get a sale closed, the greater risk there is of a negative price swing.

One of the bigger issues in the fed cattle market comes with structural changes over the past 15 years in the meatpacking industry. As the industry has become more concentrated and more vertically integrated, livestock marketing has changed as well. Negotiated price trade has been replaced with formula pricing and contracts, or as USDA calls them, "alternative marketing agreements." A recent USDA study showed negotiated fed cattle sales averaged 50% to 60% of the sale volume as recently as 2004, but have dropped to 20% to 30% of sales in the past few years. Formula pricing now accounts for more than 60% of the fed cattle sold.

Under formula marketing agreements, the base price may be considered confidential. Thus, there are fewer negotiated prices being reported to USDA for the fed cattle trade under the USDA Livestock Mandatory Price Reporting Program. And yet, many of the alternative marketing agreements use the USDA reported price as a basis or index price for those contracts. USDA notes this has turned its Livestock Mandatory Price Reporting system from a reporting tool into a price discovery tool, even as USDA is collecting prices on fewer sales and less cattle.

"Thus, the negotiated trade is being leveraged more heavily even as it declines in volume," USDA's report in August stated.

Nebraska Cattlemen has recognized this problem between the negotiated cash sales and formula contracting. The group issued an interim policy in October in which its board noted the lack of negotiated cash sales had reduced competition. The Nebraska Cattlemen policy "strongly encourages sellers of fed cattle to be more active participants in creating a more vibrant cash-negotiated market." The group will be holding meetings with members across Nebraska in the coming weeks, seeking to get more input on these market issues.

"It's harder for the market to interpret the cash information when it becomes thinner and thinner," Stolle said.

DTN Livestock Analyst John Harrington noted the big argument supporting mandatory price reporting was that it would provide more information and pricing options for producers.

"I applaud the effort and more cash marketing may help, but I just think there is a serious disconnect between the cash market and futures right now," Harrington said.

The Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF USA) is sponsoring meetings across North and South Dakota next week to discuss challenges in the markets and possible remedies that could be taken. The events are being organized by South Dakota cattle producer and former auction sale owner Herman Schumacher, who said producers want to know what can be done to fix the broken markets.

R-CALF noted fed cattle prices in September were 40% below 2015 while feeders were one-third lower. Earlier this year R-CALF convinced a U.S. Senate committee to ask the Government Accountability Office to investigate the price declines in the cattle markets.

One of the invited speakers at the R-CALF meetings next week will be Kim Ulmer, a livestock marketer and owner of Huron Continental Marketing. Ulmer has been asking cattle producers to fill out a survey providing their take on what is going on with cattle futures on the CME board of trade. "The only way to get changes made is to have some sort of survey from the producers," Ulmer said.

"We feel like there are some changes that have happened on the board of trade that are causing part of the problem and they give large corporations an advantage," Ulmer said.

After Ulmer completes a round of meetings with various producer groups, the survey results will be sent to the livestock division of the CME, the CFTC and members of the Senate Agriculture Committee. Like others, Ulmer said a high percentage of producers filling out the survey say there is too much movement limit up or limit down in the cattle markets. "It doesn't match what is going on in the industry," Ulmer said.

Ulmer added that the noncommercial traders are having too much influence on the day-to-day swings in the market. "We aren't saying speculators shouldn't be allowed to play the board, but we are saying it is simply a speculators' board," Ulmer said.

The United States Cattlemen's Association announced on Monday it had launched a website, CattleMarketNews.com, for livestock producers trading cattle. The site will include commentary and USDA price reporting statistics.

"The current volatility of the cattle market has been driven in part by a drastic decline in negotiated fat cattle sales, the rise of the algorithmic trader, and an overall disconnect between the actual fundamentals and trends," stated USCA President-Elect Kenny Graner. "Markets operate the best with informed and active participants; CattleMarketNews is intended to help drive this action."

The problem is that feeders can also become reluctant to commit to a cash sale. Superior Livestock Auction has put together a Fed Cattle Exchange with weekly sales on Wednesday. The goal, Superior stated in announcing the sales in September, was to provide the cattle industry with more transactions to help determine the average cash price for market-ready fed cattle. USDA then added those sales to its mandatory price reporting data.

Yet in Wednesday's sale, more than 12,000 cattle were initially offered in the auction, but only 3,492 sold at an average price of around $105.50 per cwt. That's $2 to $4 higher than last week, but there were still roughly 8,500 head in which the sellers opted not take the offered price. Harrington said that shows most feeders want to keep their options open for a formula rather than take a cash bid, even when the price has moved up on the cash market.

"If you are a packer and you see that kind of non-participation, how many times are you going to show up?" Harrington said. "If you are going to be a cash play, you have to be there all the time."

The futures market also is doing just that -- looking to the future of 2017. The heifer retention and herd expansion over the last two years is going to come to fruition with potentially more calves in 2017. Meanwhile, beef will have to continue to compete in the retail case with pork and poultry industries that are also expanding.

"The futures have been all about anticipating greater production in 2017 and the out years," Harrington said. "Is it proportional? I don't think so, but futures are kind of the tail wagging the dog right now."

The end result, Harrington said, is the expansion could convert to a liquidation for producers getting less money for their feeder calves.

CattleMarketNews.com website: www.cattlemarketnews.com

Details on R-CALF meetings: http://www.r-calfusa.com/…

Nebraska Cattlemen interim policy on fed cattle trade http://www.nebraskacattlemen.org/…

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CATTLE AND BEEF BY THE NUMBERS

The USDA Cattle on Feed in October report showed the volume of fat cattle going to slaughter in September was up 5% from a year ago while the total feeder-cattle population in larger feedlots was at 10.3 million head, just slightly ahead of last year's volume. Still, feeder placements in September totaled 1.91 million head, down 2% from last year and the lowest September placements reported by USDA in 20 years.

Cattle feeders from Canada are down 39% from a year ago, but the number of slaughter cattle coming from Canada is up nearly 32%.

The volume of Mexican feeder cattle entering the U.S. market is down 26% from a year ago as well.

Overall, the tonnage of fresh beef imports into the U.S. is down 13% from a year ago, according to USDA.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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