D.C. - At a hearing this week called by the U.S. House Agriculture Subcommittee on
General Farm Commodities and Risk (Subcommittee), R-CALF
USA CEO Bill Bullard,
on behalf of independent U.S. cattle producers, testified
about the urgent importance of funding and supporting the Commodity and Futures
Trading Commission's (CFTC's) implementation of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Wall Street Reform Act) that would restore
an open and robust marketplace so independent U.S. cattle producers will, once
again, have a genuine, legitimate and functional price discovery and risk
management tool that is unavailable when the market is prone to manipulation
Bullard pointed out how important it is for
the Subcommittee to understand there is a clear demarcation point between the
live cattle industry and the beef packing industry, and that demarcation point
is so profound that often there is an inverse relationship between the economic
prosperity in the cattle industry and the economic prosperity in the beef
That competition between the live cattle
industry and the beef industry should be
fierce in a free market system, but
today it isn't because a handful of concentrated packers have all but captured
the marketplace for live cattle, leaving the U.S. cattle industry in a severe
state of crisis, he said.
"For the benefit of this Subcommittee, we
looked up the 16 states that are represented by the 24 members of this
Subcommittee and realized that over the past 10 years - where data are
available - the 16 states have lost 49,850 cattle producers," Bullard pointed
out. "The size of the beef cow herd in those 16 states has been reduced by 1.3
million head, and the production of cattle and calves in those states has been
reduced by 935 million pounds.
"Today I want to provide evidence showing
that the dominant beef packers are engaging in practices that are destroying the price discovery and the risk
management functions of the cattle futures market -- practices that the Wall
Street Reform Act can address," said
In February 2006, four of the largest
meatpackers engaged in a coordinated action of withdrawing from the cash market
for an unprecedented 2-week period. Industry analysts, at the time, said the
packers did this to gain control over cattle prices, which they did. Cash
prices fell $3/cwt during the packers' boycott, and live cattle futures markets
fell to multi-month lows during the period. The effect of this coordinated
action was to destroy - completely - the price discovery function and the risk
management function of the cattle futures market, and this caused direct
financial harm to cattle producers that were selling cattle all across the
2008, R-CALF USA testified before Congress and said if this type of attack on
our marketplace is not addressed by Congress immediately, cattle producers
would experience this type of problem again in the near future.
we didn't have to wait long before our prediction materialized," Bullard said.
On the last trading day of October 2009,
the cattle futures market fell the limit to $81.65/cwt. There were no underlying market forces that would
warrant this break in the market, suggesting that a dominant market participant
had shorted the market. The cash price at the time was $87.50/cwt, and R-CALF USA views this as the worst
convergence in a long time in the cattle futures market.
Feb. 7, 2011, the CFTC ordered a trader - Newedge - to pay a penalty of over
$220,000 for unlawful activities that occurred in October 2009, an action in
part pursuant to the new Wall Street Reform Act.
The CFTC found that in October 2009,
Newedge exceeded the contract speculative limit for trading cattle by over
4,000 contracts, which it had purchased from JBS, the world's largest beef
packer. Then, Newedge sold JBS an over-the-counter swap in live cattle.
"The cattle futures market has to be protected, as we've already
seen that we have severe problems in the market, and that's why we support
strongly a reduction of the number of speculators who are involved in the
market," added Bullard. "We also believe it is improper for a packer - who may
be a physical hedger - to step out of the role of a physical hedger and then suddenly
become a speculator to try to manage the direction of the market. And we
believe that has been ongoing for a number of years."
He also explained to the Subcommittee how
important a thriving cash market is for fair and accurate price discovery, yet,
there has been a thinning of our cash markets over the years. For instance, in
2005, 52 percent of cattle were sold on the cash market. By 2010, only 37
percent of cattle were sold on the cash market. And, in some markets -- like
Colorado -- only 20 percent of cattle now are sold on the cash market.
"We think the most important thing is to bring transparency to the opaque markets like swaps or over-the-counter trades and we think the priority for the CFTC should be to implement those as quickly as possible, because it's one thing for an industry to change because of competitive forces," Bullard concluded. "It's quite another for another industry to be fashioned because of the anti-competitive conduct that's occurring in the market, and we don't know about it. We need transparency so the regulators can see, with certainty, what involvement the dominant participants are having in marketplaces that are as important to the cattle industry as is the cattle futures market."