price discovery, transparency and volatility in beef markets

price discovery, transparency and volatility in beef markets

P.O. Box 80299, Lincoln, NE 68501 | (402) 421-4400
PRICE DISCOVERY, TRANSPARENCY AND VOLATILITY IN BEEF MARKETS
Issue:
Volatility in the futures markets and “thin” cash markets for cattle have raised concerns with the
ability of these markets to determine the value of cattle for market participants. As such,
alternatives are being discussed to help provide better pricing information in beef markets.
Background:
Futures markets for feeder cattle have become increasingly volatile. The volatility has made it
difficult for participants in the industry to use futures for risk management and price discovery.
The increase in volatility can be traced to many issues. Low levels of liquidity have always been
an issue in cattle futures and it appears to be getting worse. With low trading volumes, it doesn’t
take too many traders getting in (or out) for the prices to have dramatic swings. Also, due to the
use of computerized, high frequency trading, the speed of the price swings can be magnified.
The influx of large traders from outside agriculture who are managing portfolios with different
goals not related to the market fundamentals can also add volatility. Changes in trading hours
and daily price limits have also allowed markets to adjust faster. All the above might be contributing factors to the increased volatility.
At the same time, concerns have been expressed with the “thinness” of cash markets for fed
cattle in some parts of the U.S. According to Beef Magazine, (When cash was king of the beef
market, Wes Ishmael, April 7, 2016) around 80% of all fed cattle traded in the U.S. are sold
under Alternative Marketing Arrangements like formulas and forward contracting. Overall,
studies have shown the national markets are fine. However, local cash markets in the southern
Plains are largely gone. Nebraska is generally thought to have a fairly robust cash market and
some have suggested efforts should be made to maintain it in the future. The thinness in the
cash markets in parts of the U.S. raises questions of whether cash markets effectively
communicate the signals necessary for participants in the industry.
The shrinking cash market and futures’ unreliability as a risk management tool are inter-linked in
that price discovery in cattle markets. Some market participants believe the industry will need to
act soon to address the issues.
Farm Bureau Policy:
221 / COMMODITY FUTURES AND OPTIONS
1. Commodity futures and options trading serves a useful purpose for a number of
commodities by providing a means to transfer certain types of risk.
2. We support:
2.1 Maintaining the integrity of all U.S. commodity futures and options exchanges as a
pricing mechanism by the members of the exchanges and their overseeing governing
bodies. Such integrity includes consistent convergence between cash prices at delivery
points and futures prices at contract expiration;
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2.11 Changes in current futures contracts if research shows that such changes will result
in maintaining or increasing liquidity of value.
310 / LIVESTOCK MARKETING
1. Livestock producers should have access to competitive markets for price discovery that
accurately determine the value of their products.
2. We support:
2.3 Rights of producers and packers to enter into formula pricing, grid pricing, and other
marketing arrangements and contract relationships.
Policy Questions?
1. Is volatility in the feeder cattle futures markets creating problems for cattle producers in
your area?
2. Should private industry and associations work cooperatively to resolve price discovery
and volatility issues? Or should government seek to regulate the markets more?
3. Should regulations limit futures market participants to only those in the beef industry?
4. Should feeders and market participants who use AMA’s pay a fee to help maintain cash
markets?
5. Is a possible solution to smaller cash markets to create e-markets that might help provide
price discovery?
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