Meat Casino, Market Nonsense, The Domino Effect of Uncertainty

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.

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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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