Meat Casino, Market Nonsense, The Domino Effect of Uncertainty

Hold on to your ranching hats, the meat market threw off its robes of anonymity for a few seconds with a Wall Street Journal piece out yesterday calling it a “meat casino:”

It’s madness. The market makes major moves for no reason,” said Blake Albers, a cattle feeder in Wisner, Neb. “Someone sells 40 head in Iowa and it has the potential to revalue all the cattle in the nation,”

What is Blake, the Nebraskan cattle farmer, talking about? Basically, that the decline in cash transactions for cattle has left the futures contracts that are designed to allow for the hedging of risk related to movements in those cash prices –  to move up and down with no reason behind it all. That’s an issue, because when the cattle farmers stop trusting the market, they stop hedging their herd, and then liquidity in the market drops off – creating a sort of negative feedback loop where fewer people hedge because fewer people are hedging, in theory creating bigger price swings in real life cattle prices, possibly even making it to the deli counter at your local grocery store.

Here’s the WSJ graphic showing the decline in cash transactions in the cattle markets over the past 10 years.

Meat Casino in Cattle Markets_1

While the CME Group likely doesn’t like one of their products being called a “Meat Casino,” the world’s largest futures exchange has called into question the contracts they themselves list, by not listing futures new cattle contracts.

CME Group Inc. said that is because trading of physical cattle has become so scant that the futures market can’t get the signals it needs to set prices.

Which causes problems for the cattle farmers, because now they don’t have the information they need to raise their next herd.

The failure to list contracts after October 2017 is a problem for ranchers buying calves this summer. They typically need around 18 months to grow to slaughter weight, meaning ranchers are exposed to possible price swings in the 2017 winter.

There’s no doubt CME not listing the contracts is going to cause major issues moving forward, but are the farmers’ complaints valid? Is this something new or is this problem just now getting traction? We reached out a couple people we know in the space, whose families have been in the cattle business for generations to see if this is a new trend or if this is a problem that is just now coming to light. Turns out the “meat casino” has been around for decades. Their basic take – it’s nothing new.

Bob Wharton of Wharton Capital had this to say:

“Cash business has certainly changed over past 20 years but this is not a new development for futures business.  CME not listing new contracts is because there has been a push by some to make Cattle a cash settled contract.”

While Todd Delay of Gamma Q followed up with:

Stale news , feeders dug their own hole . Cattle were too heavy and couldn’t compete with other red meat . We actually like the way the markets working as do most Feed yards where cattle are hedged in such a strong basis type market. 

The casino or malfeasance that took place is when guys placed cattle on feed day 1 with 100 dollar per head losses, this is the article which needs disseminated.

Stay tuned for what happens next – but the professional cattle traders we’re talking to aren’t ringing any alarm bells just yet. Markets are still reacting to market conditions, such as record-breaking cattle kills and unpredictable snow storms in the plains, and it remains a viable contract for systematic traders – who typically only trade in the front months, anyway; so they don’t much care about no contracts currently listed beyond 2017.  Of course, the CME will need to green light a few more contracts out beyond 2017 if it is to remain in portfolios. If not, it could go the way of pork bellies – perhaps the most famous futures contract out there for people who don’t know futures.

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The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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