Cattlemen talk market volatility
Larry Schnell, owner of Stockmen's Livestock Exchange in Dickinson, drew applause from his industry colleagues Friday when he said cattlemen are angered when traders use subtle deviations in the cattle markets and cause major price fluctuations that trickle down all the way to their operations.
"That's why it's so hard for us to accept that we should face the consequences of all the trading that takes place under the table, in the dark," Schnell said. "That's hard for us to accept. ... These people here, they're not a part of that. They only suffer the consequences of that trade."
Many from the western North Dakota and South Dakota cattle industries gathered Friday morning at Stockmen's to listen to Schnell and other industry leaders speak out on problems they see in the cattle markets at a forum hosted by U.S. Sen. Heidi Heitkamp, D-N.D.
Heitkamp, Schnell and five other panelists sat in the Stockmen's sales ring—where cattle are typically showed for auction—as they discussed market concerns for more than two hours. Other panelists included Bowman rancher Steve Brooks, who is president of the North Dakota Stockmen's Association; Justin Lumpkin, a U.S. Department of Agriculture marketing officer; Larry Kinev, president of the Independent Beef Association of North Dakota, and cattle buyer Fred Berger, of Mandan.
"What we were talking about here today isn't, I think, about the high prices or the low prices," Schnell said after the forum. "It's about the volatility. It's about the volatility where the market changes for what seems like no reason whatsoever."
The managing director of commodity research for the CME Group, which operates the Chicago Mercantile Exchange, said the exchange is months away from fixing issues that cause excess volatility in cattle markets. David Lehman told cattlemen that the exchange, in the next couple of months, will implement market circuit breakers on live and feeder cattle to install limits on how cattle contracts are traded.
He said it should help ensure market integrity. The circuit breakers are intended to keep prices from skyrocketing or bottoming out based on volatile activity in the market regardless of the speed or way people are trading.
“Rather than a hard limit that stops the market, it halts the market,” Lehman said, adding it will trigger if live cattle prices move more than $1.50 during an hour, or $2.25 for feeder cattle.
Ron Volk, a rancher from the Sentinel Butte area, said he understands the reasoning for implementing the circuit breakers but told Lehman he doesn't believe it'll be a permanent fix for the market's instability.
"It seems to me like we've got a broken leg and you're trying to throw a couple Band-Aids on it," Volk said. "I don't see it changing anything. It's prolonging the broken leg. Now instead of putting a cast on, you may have to cut the leg off."
Lehman said he agreed that "the leg is broken," but said circuit breakers already help deter volatility in many markets, including oil and precious metals.
He said the circuit breakers are being put in place to limit moments like one that happened last week when 175 feeder cattle contracts—nearly three times the average daily trades made—were traded on the Chicago Mercantile Exchange and caused cattle prices to drop significantly.
"That set off a cascade pushing the market down until it found the other bids or offers that could match this 175-lot order," Lehman said.
The problem, the panel said, is the volume of electronic trading happening by hedge funds or others who normally wouldn't trade cattle futures, but do so based solely on market deviations.
Schnell believes it's "nerds writing programs who are looking for an advantage."
"What some of those algorithms trade on is only the knowledge of the trade, not knowledge of information," Schnell said. "To us, that's insider trading."
Mike Heaton, a McKenzie rancher and member of the Independent Beef Association of North Dakota, said those outside of the cattle and agriculture industries trading live and feeder cattle and causing volatile prices swings in the markets, are comparable to parasites.
"There's a whole other world out there of people living off of our industry," he said. "When we get no return on it, they're like the parasite that I get rid of in my cattle."
Heitkamp said the Senate Agriculture Committee—of which both she and Sen. John Hoeven, R-N.D., are members—is holding a hearing about the volatility in cattle markets Thursday in Washington. She said part of the reason for hosting Friday's forum was so she could get an idea of what North Dakota cattlemen believe are the biggest issues.
"The more this marketplace does not work for the people in this room, the more difficult it's going to be to manage it," Heitkamp said. "The more people who pull out, the more irrelevant it is."
Herman Schumacher, a cattleman from Herreid, S.D., challenged Lehman on the constant cattle market fluctuations and said he believes the issue comes back to hedge funds and the meat packing industry trying to build a greater stake in the market.
"We're fighting to try and not chicken-ize the cattle industry," Schumacher said, referring to the influence large corporations have on the poultry trade.
Schumacher said he thought the input cattlemen from the area had at the meeting was beneficial as Heitkamp and others take their issues back to Washington next week.
"The only thing that keeps us separate from them (the commercial meat packing industry) are these cowboys that you had sitting there," Schumacher said, pointing to chairs behind him.