22 February 2011

3 minute read

North America

Background

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 February 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.

CALF USA immediately recognised the symptoms of this particular unlawful market manipulation and formally notified federal regulatory officials in late 2009 and early 2010 of the disastrous consequences to US livestock producers resulting from that manipulation.

At that time, R-CALF USA witnessed a severe break in the cattle futures market, likely indicating that a dominant market participant had shorted the market, causing the futures market to fall the limit. However, R-CALF USA had no knowledge at that time regarding which dominant market participant was involved.

"This was among the worst convergences that I have seen in the futures market for a long time," wrote R-CALF USA Marketing Committee Chair Dennis Thornsberry in his 2009 complaint.

"It is unlikely that the futures market can attract sufficient long positions to add the needed liquidity to the futures market for determining the value of cattle when the market remains vulnerable to those who would exercise speculative short selling to effectively drive down the futures price.

"Given that this type of volatility cannot be attributed to market fundamentals (but, according to market analysts can be triggered by a $50 million infusion, which is not beyond the means of hedge funds and perhaps the dominant beef packers), small to mid-sized producers would not have the financial wherewithal to cover the margin calls associated with such a volatile market.

“This, I believe, plays directly into the hands of the large corporations that use the markets daily to gain an advantage over the small to mid-sized producer,” he asserted.

“And, the volatility in the futures market caused by manipulative practices has rendered it incapable of serving as a risk management tool for the small to mid-sized producer and is contributing to the exodus of these producers from the industry.

“R-CALF USA believes the October 2009 live cattle futures market transaction that involved both Newedge and JBS, and in which Newedge was known to have engaged in unlawful activity, was a significant, contributing cause for the manipulation of cattle prices and resulting harm to US cattle producers,” said R-CALF USA CEO Bill Bullard.

“Further, and based on available information, we believe JBS’ involvement in this transaction constitutes a direct violation of the Packers and Stockyards Act of 1921 that prohibits beef packers from engaging in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices.

"We formally request GIPSA and the Justice Department immediately take action against JBS for its role in this unlawful price distorting futures market transaction."

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