California officials recently subpoenaed a Houston-based firm to determine if the company assisted power plant owners in artificially boosting energy prices during that state´s now infamous power crises. What did the company, Industrial Information Resources, allegedly do? It provided data that power plant owners could have used to manipulate the energy market.
What has this got to do with livestock, you may wonder?
A much-too-regular basis another entity issues reports and disseminates data that some large firms then use to manipulate a market: the cattle market. Only this entity, the United States Department of Agriculture, is NOT called on the carpet or issued subpoenas, but instead is given the blessing of our politicians. Why is one entity guilty of helping to destroy a market and the other is thought of as providing a very important service? Talk about a double standard!
The information disseminated by Industrial Information Resources was obtained from plant personnel who worked for the very same companies that were then using that information to allegedly gouge their customers. Couldn´t the same thing be said of a feedlot manager affiliated with one of the Big Three packers providing on-feed numbers to the USDA? Especially when a futures trading subsidiary of the same firm then uses that information to jerk the cattle market around.
In the California energy case an administrative law judge said, "This dissemination of energy information among competitors may have facilitated market manipulation by sellers of energy." HELLO! isn´t that what is routinely being done in agriculture with the collection and dissemination of on-feed and crop reports? A spokesman for California´s Attorney General had this to say about the anticompetitive conduct and market manipulation: "When companies communicate with each other directly or through a conduit about current or future supply we are very interested." I only wish those agencies who are supposed to be charged with keeping our livestock markets free and lawful would share that sentiment.
A Better Blue Book
A cheerleader for the big packers who writes a weekly column recently stated that January price declines in the cattle market were caused by the two large video cattle auctions who offered a large number of cattle for sale within a three day period. The casual reader might read that opinion, consider it reasonable, and shake his head in agreement. Except that´s not even close to what transpired.
This reporter happened to be at ground zero when the previously described events took place. The week prior to the large video sales, the cattle market was rising. Thankfully, we had a much more optimistic blue book for our cattle and the price of fat cattle even reached 80 cents! Packers and cattle feeders strategically aligned with them, were well aware of the large number of cattle to be offered in the upcoming video auctions and knew that, in order to maintain inventories, they needed to buy them. They also knew they were reluctant to participate at the new price levels. Lo and behold, right before the video sales began, out of nowhere came news about missing vials of biologicals. On the screens of DTN machines across the country pundits opined about their devastating potential if they got in the hands of the wrong people. Those rumors drove futures prices and live cattle prices down sharply. After the feeders and packers had bought their cattle on the video sales at lower than hoped for prices, no more was heard about the rumors that had caused the market to drop in the first place.
A single occurrence, you say? Not really. The exact same thing happened with rumors of foot and mouth in Kansas feedlots that were not true. But the rumors served their purpose. They took a nickel off the price of cattle during a heavy marketing period. Once again, after the sales were over, no more was heard about the rumors.
What´s that old saying . . . "Fool me once, shame on you. Fool me twice, shame on me?"
It seems any rumor will do. Anytime the price of fats gets close to eighty here comes another rumor or another negative reaction to a government report. In today´s monopolized cattle market packers do have other options to lower the price they have to pay for fat cattle: They can either slow down chain speeds in their plants or even close down a packing plant for a day or two to back cattle up and drive down prices. But this costs them some money. It´s much easier, and certainly more profitable, to get the market moving lower based on rumors or USDA reports.
And the worst part is . . . we are willing co-conspirators.
Looking Through Green-Tinted Glasses
Doug Wildin of Kansas is a long time opponent of futures trading and of government reports. And with good reason. Doug has studied USDA reports and their effect on the cash wheat market for years. For example, Doug took notice last November when the cash price of wheat went down a whopping 78 cents per bushel in six trading days following a November 5 USDA report. What was in the report? Basically three words . . . "Wheat looks better." Did the USDA statisticians put on their boots and actually go look at the wheat? No, wheat farmers volunteered the information.
In the time period from October 16, 2002, to January 14, 2003, the price of wheat dropped $1.41 per bushel, despite wheat stocks being at their lowest level since 1983. Wildin says that $1.14 of that $1.41 price drop can be attributed to the issuance of four USDA reports and one from a Kansas crop reporting service. Sure enough when you look at actual elevator wheat prices and add up the drop in the price of wheat immediately following those reports it comes to $1.14.
On January 10 the USDA issued a report that sent the price of wheat down 36 cents per bushel in just three trading days. The price dropped 19 cents on the day of the report, 9 cents on the next trading day and another 8 cents on the third. All because the USDA said that" 62 percent of the nation´s crops are in excellent condition." Not 60 percent or 70 percent but 62 percent. Are we to believe that the folks at the USDA are that precise? And please note that they hardly ever actually quote anyone. It´s always, "an analyst said," or, "an expert projected." Here´s a typical direct quote from the USDA: "Though drought has reduced the crop in the United States, prices need to come down to revive U.S. export business," analysts said."
What analyst? Who does he work for? Who said prices need to go down?
The answers given to USDA survey takers depends on one´s perspective. Ask a grain trader or buyer how the wheat looks and more often than not it will be, "Oh, it looks great, belly deep to a bull." Of course, he might be looking through green tinted glasses: green as in cash. The farmer growing it might have a different story.
Even foreign countries know how to play the game. One minute a country issues a press release stating that they won´t be needing any grain from the U.S. after all, and the next minute they are buying our grain AFTER their first press release drove down the price they´d have to pay. When Tunisia bought grain from France and Russia instead of the U.S. our price tumbled. Is Tunisia really that big a factor?
Here´s another quote that sent wheat prices downward: "Prices tumbled in response to a USDA report saying that supplies are much higher than previously thought." What happened, did the USDA find some extra wheat in their basement? What happened to their 62 percent-like accuracy? Were the previous USDA reports wrong or could the latest one be in error? With USDA´s track record both reports are probably wrong. But they still did damage to the price of wheat and the people who grew it.
How Do They Know?
If it could happen in wheat couldn´t the same thing happen with beef? This reporter looked in the futures prices section in the Wall Street Journal for the past six months and every time the cash market for beef tanked I looked in their futures reporting section and made note of their comments. I found recurring themes on every down day. Here´s just a small example of the verbiage responsible for sending down futures prices for beef on a regular basis:
"The perception is there is plenty of beef out there."
"Unexpected bearish reports by the Department of Agriculture."
"The market moved lower on nervous short covering from speculators."
"Heavy selling by speculators caused prices to fall sharply."
"The market moved lower on technical based selling."
. . . "the result of end of the week profit taking by speculative funds."
"The threat of a winter storm . . ."
"Rumors of poor export sales."
"Heavy selling by commodity funds."
"End of the month positioning."
"Traders said speculative commodity funds could smell the blood of the bulls."
"Government report showing U.S. supplies at much higher levels . . . "
And on and on. A meteorologist can send the beef market down with a comment about increased chances for rain. But the market NEVER reverts back to previous prices after no raindrops fall. Please tell me . . . did any of this have anything whatsoever to do with the available supply of beef that day, that week or even that month?
The USDA issues world reports about commodities around the globe and these effect the price you receive for your cattle. But our government can´t even find a certain terrorist, how can we possibly know how much grain is produced in Ghana or beef in Brazil? We all know how many times the government has had to issue corrections. But that hasn´t stopped them from aiding and abetting gambling in the futures pits.
Doug Wildin asks: "With constant regular reports of the manipulations going on in the stock market, can there be any doubt the same thing is going on in our commodity markets?" Good question. In the news on the morning this story was written there was a report of one firm being fined $70 million for manipulating trades on NASDAQ. And this is an all too often occurrence lately. Why should the more loosely regulated commodities markets be any different?
The Commodity Futures Trading Commission has a 500- person staff to police 797 MILLION futures trade per year. Their chairman says everything is hunky dory and that they are on top of the situation. Yeah, just like the SEC was when they let Enron, World Com and others decimate the pension plans of poor working stiffs.
We have seen scandal after scandal involving insider stock trading, derivatives and phony financial reports. Doesn´t it stand to reason that a market that can be moved with "potential yield reports" and non-news items would also be a fertile field for corruption?
Why we are expected to give our adversaries the bullets to shoot us with is beyond me. We are so generous in sharing our information that it´s like playing poker with card sharks and showing them our hand. When the USDA tells the world how many bushels or pounds of beef we plan on producing, even before we´ve done it, all of us are put at a great disadvantage.
Would Wal Mart be expected to give up the same type information? Of course not. Then why should we? When a company insider or ex-employee gives up company information that is far less damaging, lawsuits and jail sentences are the result. Most U.S. companies erect firewalls and safeguards for the specific purpose of not letting any such sensitive information out. In many factories tight security systems only allow specific employees to enter certain areas of their facilities so that no one person has too much information.
Is it really anyone´s business how much beef you produce? If someone asked you how much money you made last year you´d consider them rude or perhaps punch them in the nose. But a USDA staffer calls and a cattle feeder spills his guts and hands over the combination to his future. And here´s another very important point to ponder: Have you considered the implications if just one mega-feeder gave out misleading information for the purpose of making a killing in the futures markets?
Are the businesses of farming and ranching that much different than any other business? Should groups collecting information to be used by commodity buyers have free access to what any other business would consider confidential information? Any industry that voluntarily divulges as much information to their competition as we do is bound to eventually be a ward of the government.
Perhaps we should follow our government´s lead. Between January and November of last year more than 600,000 manufacturing jobs were lost. In the same period U.S. employers announced over 2,000 mass layoffs. Now this information was an embarrassment to the Bush Administration, so, what did they do? Last Christmas Eve the U.S. Department of Labor announced that it will no longer collect or publish data on mass layoffs. The reason given was to save money.
Hey, we want to help ease the budget crunch too. They shouldn´t be the only ones to suffer. We sure could save the USDA a lot of money by stopping them from prying into our businesses and sticking their nose where it does not belong.