Why is there $9.5 billion for livestock producers in the Coronavirus Aid, Relief and Economic Security Act (CARES) signed by President Donald Trump on March 27? There is also aid for horticulture producers and for local and regional markets. (There is an additional $14 billion to reimburse the U.S. Department of Agriculture (USDA)’s Commodity Credit Corporation for funds already disbursed to compensate farmers for income lost due to President Trump’s trade wars.)
On March 23, RCALF USA, an independent ranchers’ organization, sent a short letter to all Senators then debating CARES that called for structural reforms to the live cattle and beef industry, not just emergency assistance. The letter was accompanied by a chart showing a declining price trend for live cattle beginning in 2015, while consumers paid increasing and even record high prices for beef. The CARES bill includes no structural reforms to reduce meatpacker control over live cattle prices and to restore competition between meatpackers and open markets for livestock.
For years RCALF has been leading efforts with other organizations to reform these unfair practices. In 2014, IATP and 150 other organizations wrote against proposals in the current Farm Bill that limited the ability of the USDA to investigate and punish anti-competitive agribusiness practices. A broad coalition protested to President Trump in a November 2017 letter that USDA had withdrawn Obama administration rules that would have made markets more competitive and support both family farmers and consumers.
On March 19, Senators Mike Rounds, Steve Daines, Kevin Cramer and John Hoeven — all Republicans from major livestock producing states — wrote to Attorney General Bill Barr and to Assistant Attorney General Makan Delrahim, head of the Department of Justice’s (DoJ) Antitrust Division. The Senators wrote, “According to a large volume of our constituents and member organizations, allegations continue to surface against packers for price-fixing schemes designed to undercut competition.” The Senators asked DoJ to investigate the packers under the authority of the Packer and Stockyards Act of 1921, whose enforcement one scholar characterized in great and minute detail as “A History of Failure.”
It is almost certain that DoJ will do nothing except perhaps to tell the Senators what they already should know — that USDA must initiate the investigation and refer the case to DoJ, which USDA almost never does. However, the Senators could still write a different and more effective letter for their constituents — to Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert, sponsor of the CFTC’s Agricultural Advisory Committee— to ask that the CFTC staff investigate price movements in exchange and non-public trading data in live cattle futures contracts in late 2019 and 2020. The Senators could demand that Chairman Tarbert report the CFTC findings to the Senate Committee on Agriculture for possible legislative action. Under the Commodity Exchange Act (CEA) provisions to prevent and discipline “market disruption,” the CFTC could take administrative law actions without having to meet the very high DoJ burden of proof of intent to fix prices. (See James Lieber’s Rats in the Grain: The Dirty Tricks and Trials of Archer Daniels Midland to learn how difficult it is to prove intent.)
For example, the Senators could ask whether currently unregulated automated trading of live cattle contracts triggered an exchange determined price limit halt in trading on a given day or days. If the CFTC staff found inexplicable anomalies in public and non-public trading data, the Commission could subpoena source codes of the trading algorithms to investigate whether price volatility between prices asked and prices bid was induced. If the algorithms contributed to market disruption, rather than CEA mandated price discovery, administrative law action could be taken without proof of intent.
According to Barchart’s historical prices, the Chicago Mercantile Exchange (CME) live cattle futures contract for April 2020 delivery peaked at about $128 dollars per hundred pounds on December 16, 2019 and hit a low of $91 on March 16. The April 2021 contract continues the downward price trend, with a peak of $124 on January 15 and a low of $99 on March 18. The March 24 CFTC Commitment of Traders (CoT) report of contract trading positions open at the end of the trading day shows that 114 “Producers/Merchants/Processors/Users” (collectively, “commercial [price] hedgers”) held 136,124 contract “short” position taken in anticipation of falling live cattle prices. Ninety-eight commercial hedgers held just 51,675 “long” positions taken in anticipation of rising live cattle prices. Overwhelmingly, and even without taking intraday trading data into account, COT reported short selling was and is driving down futures prices, the benchmark for cash prices received by ranchers for live cattle deliveries.
Livestock producers have no interest in driving down prices for live cattle. Cattle merchants, beef slaughterhouses and processors, and retailers of beef have an interest in driving down prices to increase their profits. The $9.5 billion, depending on how it is distributed and when, will allow some producers to continue to provide underlying assets, i.e., live cattle, for derivatives trading. There is no law that prevents short-selling in the midst of a pandemic or other catastrophe (nor a law to protect the health of the migrant labor that is another crucial component of the meatpacker business model). With long and short positions so out of balance among commercial hedgers, who takes the long side of livestock futures contracts and why?
The derivatives strategies of all the actors in the beef value chain are far more complex than can be explained here. The timing of contract strategies; the use of not just futures but also options contracts (options to buy and sell without the futures’ commitment to doing so); access to speed of light computer trading technology; the “rolling” of contracts shortly before the physical commodity must be delivered; the financial capacity to take on risk (and losses) — these are just a few factors in these strategies.
Both land grant universities and exchanges advise prospective live cattle derivatives investors on strategic factors. But no amount of advice can substitute for having the weight of money to risk short-term losses by taking long positions that can be rolled to an investor’s advantage. Those commercial hedgers without that weight of money cannot risk such losses. Hedging is a zero-sum game only at the initial moment of a transaction. As CARES taxpayer funds rescue both producers and, to a far greater extent, reckless banks and their corporate clients, hedging is far from a zero sum game.
According to Brett Crosby, an economist and rancher, “Often it is big investment firms like Goldman Sachs who buy the long positions, to hedge against inflation.” To judge by the March 24 CoT report in which “swaps dealers,” such as Goldman Sachs, took 69,679 long positions, Crosby could be right, though not about the “hedge against inflation” since COVID-19 presents a long-term risk of price deflation rather than inflation. Crosby supports CME’s recommendation to allow financial speculators to hold up to 25% of live cattle futures contract positions.
A position limit rule to increase speculator dominance of agricultural and other physical commodities would be one more step in the financialization of the U.S. and global economy, of which Big Meat and Big Ag are a small, though important, economic sliver. Further financialization creates a double whammy for cattle producers and other producers of agribusiness raw materials. It increases the inequality of market power between financial speculators and commercial hedgers of commodities, and it forces commodity producers to subordinate their interests and those of their communities to the unregulated hyper-short term interests of Wall Street trading.
Secretary Perdue, having demolished the USDA’s Economic Research Service according to Senator Debbie Stabenow, will have only USDA’s Office of the Inspector to advise him about whether his oversight of congressionally appropriated tax-payer funds was effective in preventing the demolition of family farms and ranches. Hopefully, the House of Representatives Oversight Committee, announced on April 2 by Speaker of the House Nancy Pelosi, will provide effective oversight if Secretary Perdue does not. Some of that oversight should be directed to how CARES benefits Secretary Perdue’s own agribusiness interests. Congressional oversight could include review of an investigation by American Oversight and follow up on USDA’s response on January 30 to American Oversight’s Freedom of Information request about Secretary Perdue’s public and private correspondence and other records about his business activities.
After this blog was posted, we learned that the National Cattlemen’s Beef Association had written to President Trump on April 8 to ask the CFTC to investigate the role of “speculators” in the CME Live and Feeder Cattle futures contracts, without asking specifically for an investigation into automated short-selling of the contracts. Senator Deb Fischer (R-NB) has called for both a USDA investigation and a Senate Judiciary Committee hearing on cattle cash and futures contract prices.