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Why limit our futures?
by Jeff Caldwell
After the Dec. 23, 2003 discovery of a case of bovine spongiform encephalopathy on U.S. soil, it was brought to my attention that some ranchers felt it was, and is, unjust for the cattle futures market to operate at the whim of futures traders. This, to some, results in market conditions that unfairly establish prices and limits for producers. This notion also calls into question the use of futures trading limits to control the limitless decline in the market brought on by an event like BSE.
What this line of logic fails to recognize is the necessity of the limit structure in order to also prevent limitless climbs in futures prices.
While our cattle futures market did limit down each day for a week of trading after the BSE discovery, it also limited up one day after limiting down. Certainly, without a trading limit, the day when futures limited up could have seen exponentially higher gains. Yet, without those same limits, our futures prices would have most certainly plummetted well below the low- to mid-$70s levels at which they seemed to stabilize after the initial "knee-jerk" market reaction.
Today, three months removed from the BSE case, the markets have stabilized somewhat. Would we be to this point without the futures limit structure?
In a conversation I had with Chuck Levitt, senior livestock analyst for Alaron Trading Corporation in Chicago, in January, when instability still shrouded the futures market, the word "volatility" was spoken several times. This is what we must get accustomed to, he said. We have felt volatility in the past three months, but now, the markets are once again as stable as they were before the BSE case.
I know I certainly wasn't alive when the stock market crashed on Oct. 29, 1929, the absolute extreme of market volatility, but from what I understand, the crash was predictated on the same kind of "knee-jerk" selling that we saw in wake of the BSE case. But, without a limit structure similar to that existing on the cattle futures market today, those sellers on "Black Tuesday" had nothing impeding them from selling every single piece of marketable stock in their hands.
If we would have had a limit system in stock trading then, would we have been able to avoid the Great Depression? No one knows, but one thing is clear--the market would not have been allowed to slide so drastically, as it did, in a single day. The trading limit would have kicked in, meaning, while the devastating stock slide may have continued through daily limited trading, the same result would not have been reached in a single day of reactive, rushed selling.
In addition, there's the notion cattle producers and ranchers should somehow be in control of the futures markets, rather than leaving that job in the hands of futures traders on the Chicago Merchantile Exchange. While this is a well-intentioned idea, as I doubt few people in the world have a greater understanding of cattle than those men and women who make their lives producing them, weren't we the ones who actually sold to the point at which we reached the declining futures trading limit in the first place?
Granted, the men and women who monitor and execute futures trading in Chicago are human, and likely would have done the same thing. But, to say we are better equipped to set futures trends on the merchantile exchange than those whose careers are based on the market activity is the no better than those outside the cattle industry who questioned our ability to produce the safest food supply in the world, as they did after the BSE story broke.
How did it make you feel to have someone, sitting in a New York newsroom or cocktail lounge, question your ability to produce cattle, as though he or she somehow knew of a secret potion to improve upon something that has paid your bills for years?
We've had catastrophic circumstances in the cattle industry before, and the fact you've survived them shows your resilience. The same resilience has been proven in livestock traders who, in the last 90 days, have taken a market with the volatility of a hydrogen bomb and created a level of stability that was commonplace up until Dec. 22, 2003.
The cattle futures have recovered. We will see those high prices we saw in early- and mid-December again. We may still see live cattle futures bounce between the ceiling and floor many times before that day, but it will happen.
Along those lines, let's allow the people on the merchantile exchange do what they do best, and continue to supply them with the safest food supply in the world.
Jeff Caldwell can be reached by phone at 620-227-1805, or by e-mail at jcaldwell@hpj.com.
Date: 3/24/04
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