Not a cattle futures fan

I like beef cattle. Live, standing before me on the ground, countable, so you know how many actually exist in a feedlot pen, on a ranch pasture or in a corral at the packing plant. These are breathing, actually existing cattle, owned by real people with real money invested in them, real commitment on the dotted line.

This is as opposed to trading cattle futures contracts at the Chicago Mercantile Exchange. One side of each contract allegedly owns real existant cattle, while the other side is a speculator who does not. Bringing them together is a futures floor trader at the Merc, who is paid a commission on each contract he trades.

The futures trader does not care whether prices go up or down, north or south--just so they move. He makes his money on the volatility. The wilder the market swings, the more trading and more money he makes. Cattle futures encourage market volatility, just the opposite of the often-quoted saw that they bring stability and liquidity to the market. The claim for futures is that they limit risk, when in reality they create and cause greater risk.

The two major movers of futures markets are breaking news, and government reports on the industry covered. Both have played in to the major drop in cattle futures prices yesterday and today.

The news is the sales of both National Packing Co. and the beef packing division of Smithfield Foods to the Brazilian conglomerate that already owns Swift and Company in the U.S. This will make them the largest meat packer in the U.S. and probably the world. They will be bigger than current number one Tyson Foods and Excel. A favorite futures trader word came into play, saying this news added "uncertainty" to cattle futures markets.

Government reports are a stickier wicket. The most famous are the USDA Cattle-on-Feed Report and USDA's biennial Cattle Inventory Report. These are received by the futures markets as the holy grail, handed down from on high as the unassailable truth of how many cattle exist.

The dirty little secret is that USDA does not go out to a single feedlot pen or a single ranch and actually count the number of cattle that really exist. Their reports are estimates, based on computer models and simulations, that are frequently corrected weeks and months after they have already destroyed market prices--in essence, the government admitting, too late to do any good, "oops, we screwed up the estimate."

Futures markets dictate, or at least heavily influence, cash prices received by actual cattle owners for their production. That is, rather than the supply-and-demand equation of cattle slaughtered and meat sold, a few market manipulators in the bowels of the Merc in Chicago are determining cattle prices. You don't want to get me started on how a few big cattle feeders, owned by packers themselves and their major stockholders, corner the futures market and seesaw it up and down for their own profit and gain.

That's why you have to take cash cattle price quotations with a grain of salt--and unfortunately to the bank, even when the price you received dropped precipitously due to somebody's market manipulations in Chicago.