Problems In Cattle Futures

Too much volume; too much volatility; too much big money; what’s a hedger to do?

Such issues have plagued the live and feeder cattle futures markets for years, but no one has come up with a viable solution.  Many traders and economists lay the blame for high volatility in the futures markets and a lack of meaningful convergence before a contract closes at the feet of index funds and high-frequency computer trading.

But that doesn’t appear to be the whole picture, agricultural economists and traders said.  And even if it were, how to reign it in is like grabbing smoke.

Derrell Peel, Oklahoma State University Extension economist, said cattle markets suffer from a “relatively high proportion of speculators as investors” rather than fundamental speculators trying to out-guess the markets.  The issue is especially evident in the more lightly traded feeder cattle market where investor moves can overwhelm any amount of cash activity.

In such cases, there is a sense of “the tail wagging the dog,” Peel said.

 

A SPECULATOR’S VIEW

 

Dan Norcini, a long-time speculative trader in cattle markets, said the market has always had, and needs, speculators, but with the advent of “algorithms,” two new types of speculator have arisen – the index fund and the hedge fund.

Index funds tend to be long-only traders who view any commodity futures market as an asset class and not as a medium for fundamental hedging, Norcini said.  They maintain market investments based on ratios of the total assets in the index.  If an index is based on the Fortune 500, then the investments have to reflect the percentages of all of the assets represented in the Fortune 500, irrespective of how an individual stock might be performing and the fundamental reasons behind the move.

Hedge funds can be classified as the managed money funds and use algorithm calculations for their trading decisions.  These algorithms can be plugged into computers, creating the high-volume traders that overwhelm the commercials.

Hedge funds often follow the momentum in a futures market and care little, if at all, about the fundamentals, Norcini said.  And they have so much money to invest, there often is no rhyme or reason to their trading decisions.

 

IS THERE A SOLUTION?

 

The question arises, then, “Is there a solution?”  The short answer appears to be “no,” but many traders lament the loss of pit trading as the only means of trading commodities.  Just looking at numbers on a screen hides the players and eliminates any reasonable guess about who is trading and why.

Pit trading is gone forever, they said, but without it, they can offer no good solutions.

However, they warn that a loss of commercial trading will doom cattle futures trading as well, just as it did the pork bellies futures market.

 

CASH CATTLE QUIET

 

No trading was reported in cash cattle markets Tuesday.

Cattle traded last week $1 per cwt lower than the previous week at mostly $124 to $125 on a live basis.  However, some traded late at $126 to $127 in Nebraska, steady to up $1.  Dressed-basis trades came in at $200 to $202, versus $200 to $201 last week.

Average fed cattle exchange auction prices last Wednesday were $1.31 per cwt lower at $123.68, versus $124.99 a week earlier.

The USDA’s choice cutout Tuesday was down $0.41 per cwt at $220.14, while select was up $1.56 at $213.89.  The choice/select spread narrowed to $6.25 from $8.22 with 70 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Monday was $127.42 per cwt, up $0.33.  This compares with Tuesday’s Mar settlement of $127.85, down $0.75.