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CEO Testifies in Support of Wall Street Reform Act That Would Bring Transparency to Cattle Markets

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Washington, 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 and distortion.

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 packing industry.

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 Bullard.

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 country.

In 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.

"And 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.

On 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."

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R-CALF USA, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America, represents thousands of U.S. cattle producers on domestic and international trade and marketing issues. R-CALF USA, a national, non-profit organization, is dedicated (more...)
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