There has been a huge problem with the way fat cattle are sold on the Chicago Board of Trade forever. However, that issue has never been addressed for a host of reasons. Today, because of a lot of reasons, we have the chance to make one change that has the chance to develop more end users as buyers on the board, create real price discovery for fat cattle, and provide a real chance for producers to hedge profits into his business.
That change is very simple and makes complete sense no matter what anyone thinks needs to be done to fix the problems with selling fat cattle. The change would look like this.
First, the USDA would come out with a report bimonthly that would determine the total number of contracts of fat cattle that actually existed for any trading period. These reports would be made six months in advance based on inventory, placements, and hold over cattle. We will be the first to say these numbers might not be perfect, but good enough to start with, and improved as we go along.
Second, the number of contracts put out by the USDA would be the only cattle the Board of Trade would be allowed to trade.
Third, because fat cattle are a perishable commodity, they need to be traded in a more realistic manner to prevent wild swings created by computer trading, and the selling of thousands of phantom cattle that don’t exist.
Fourth, it would give the producer more control of prices. For example, if fat cattle were selling weekly for $130 and someone wants to buy a contract on the board at $110, there would be a pretty good chance there wouldn’t be a seller. The limit on contracts traded would suggest selling would not be a good idea at $110. Those contracts get filled today because of the selling of thousands of contracts on cattle that don’t exist. Selling contracts at $110 drives the market down—just the opposite of what this industry needs.
There are some unseen advantages to making this change.
First, in today’s market, boxed beef is at an all-time high. You can actually buy the live cattle and get them processed and delivered to you $600/ head cheaper than they cost you if you buy boxes from the packer. That would be a pretty attractive saving for a food store to pass on to their customers, over the store that was trying to sell boxed beef.
Second, it would create more competition selling cattle on the board for the reason just mentioned.
Third, it might not take long before we had real competition selling the fat cattle on the futures and end up fixing the problem of price discovery, something we all want and need.
Finally, this request to move to sell only the cattle that exist has no bearing on any other ideas to fix the problems this industry faces. We think it will have a positive effect on the entire industry, but it is only requested because it make no sense to trade phantom cattle on a perishable commodity. There might be ideas that make this idea better and they are surely welcome. However, we don’t want this issue to get mixed up in the lawsuits, or other organizations’ solutions to problems in the industry. This is a change that needs to be made and let’s get it done right now. The timing could never be better.
Jim Warren, Aromas, CA