WATERTOWN, S.D. - Cattle producers have had a tough year with lower cattle prices and volatile markets taking a toll on their business. That was the focal point of the South Dakota Cattlemen's Association Convention held Nov. 29 to Dec. 1 in Watertown, S.D.
At the meeting, members of the National Cattlemen's Beef Association Working Group on market issues gave producers a progress report. The group was formed to address the volatility in the cattle markets and the inability for cattlemen to use the futures as a risk management tool. "We devised three different goals ... price discovery, volatility and contract specs and delivery points being the third," NCBA Working Group Chair and President Elect Craig Uden said.
They've been working the CME for the past year to pinpoint the problem with the cattle markets and develop solutions. Uden said one of the ways to decrease volatility is to make the contract fairer by modernizing the contract specifications. He said they want a contract that is more reflective of average weights today and considers current yield grade averages.
Brad Kooima, also serves on the NCBA Working Group. He co-owns Kooima & Kaemingk Commodities in Sioux Center, Iowa, and is also a cattle feeder. He said the market is broken.
"I mean, anybody that lived through last year where literally you got up to get a cup of coffee and the market changes $2.50 a hundred - are you kidding?" he said. "A 41-percent change in price for no reason. We only had a 21 percent change when we had mad cow, 20 percent when we had 9-11."
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Part of the problem, he said, was created when open outcry was phased out and trade went 100 percent electronic. He said the high frequency traders that use computer algorithms became able to influence the market and increased the volatility. They've asked CME for an audit so the Commodity Futures Trading Commission could identify who's trading, and if computer algorithm trades are negatively impacting the market. But, CME refused.
Regarding price discovery, Kooima said officials with the CME told the working group the only way to have a viable futures contract is to have a viable cash market. So the industry is trying to improve cash transparency and decrease the number of cattle traded on a formula basis, or contracted with a packer.
"The one idea that spawned from that, and I admit I was a little skeptical about, was this Fed Cattle Exchange," he said. The online auction hosted by Superior Livestock takes place every Wednesday. Kooima said so far it has been well received and has included some cattle that were previously formula cattle. Plus, he believes it is giving the producers some leverage with the packers buying their cattle.
"It's provided a mid-week snapshot of what the cash market looks like," he said. "Otherwise we were waiting until Friday at 5:00 and the futures are closed then of course."
But, he adds, it would be just as easy for more cattle producers to sell their cattle on a negotiated basis.
Kooima said they're also concerned CME will push forward a proposal to change the live cattle contract to one that is settled to a cash index. "We think that's a terrible idea, because you'll have no way to force convergence until the last minute of the last day before the contract expires. So what about the guy that's got cattle ready the first of the month and they're not going to converge until the last of the month?"
South Dakota Cattlemen's President Todd Wilkinson said the volatility, combined with the large and swift drop in cattle prices, will make 2016 go down as one of the worst years in history for their industry.
"Certainly starting in the end of 2015 and continuing in 2016 the drop in the market has been more extreme than what we've experienced before," he said. With losses as high as $700 to $800 per head at one point, there are some producers that have not weathered the storm. Wilkinson confirmed, "We're losing some producers."
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He said there are also financial institutions that are not willing to allow producers to go out and buy the calves because they don't have a viable way to hedge their risk.
Wilkinson also serves on the working group and expressed his frustration with CME. "I keep hearing verbalized to me that they're willing to work on the process, but I want to see some action. We've got producers that are losing the battle right now because they're not able to put those calves in their background yard and if we wait a year and a half to get this problem solved it's going to be too late."
