Comment Text:
10-002
COMMENT
CL-08383
From:
Sent:
To:
Subject:
Attach:
Bill Bullard
Monday, April 26, 2010 10:52 PM
secretary
Proposed Federal Speculative Position Limits for Referenced Energy Contracts
and Associated Regulations
100422 R-CALF USA CFTC Comments on Spec Limits.pdf
Dear Secretary,
Attached are R-CALF USA's comments concerning Proposed Federal Speculative Position Limits for
Referenced Energy Contracts and Associated Regulations. I have attempted to submit these comments via
www.requlations.qov
but cannot confirm that it worked. This is a duplicate filing if the submission via the website
did work. Thank you.
Bill Bullard, CEO
R-CALF USAR-CALF United Stockgrowers of America
P.O. Box 30715
Billings, MT 59107
Fax: 406-252-3176
Phone: 406-252-2516
Website: www. r-calfusa.com
E-mail:
[email protected]
April 26, 2010
David Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21
st
Street, NW
Washington, DC 20581
Via E-Mail: www.re~
R-CALF USA Comments Concerning Proposed Federal Speculative Position
Limits for Referenced Energy: Contracts and Associated Regulations
Dear Mr. Stawick,
The Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF
USA) appreciates this opportunity to submit comments to the Commodity Futures Trading
Commission (CFTC) concerning its proposed rulemaking on
Federal Speculative Position Limits
for Referenced Energy Contracts and Associated Regulations
(Proposed Rulemaking) published
at 75 Fed. Reg., 4144-4172 (Jan. 26, 2010).
R-CALF USA, a national, non-profit trade association, is dedicated to ensuring the
continued profitability and viability of the U.S. cattle industry and represents thousands of U.S.
cattle producers on domestic and international trade and marketing issues. R-CALF USA's
membership consists primarily of cow-calf operators, cattle backgrounders, and feedlot owners.
Its members are located in 46 states and the organization has numerous local and state
association affiliates, from both cattle and farm organizations. Various main street businesses are
associate members of R-CALF USA.
R-CALF USA does
not
represent the entire U.S. beef supply chain. Rather, R-CALF
USA exclusively represents the live cattle segment of the beef supply chain, meaning it
represents the farmers and ranchers located across the U.S. who breed, birth, raise, and feed live
cattle for breeding purposes and beef production. Many R-CALF USA members monitor closely
the live cattle futures market because of its direct impact on live cattle cash prices. Some R-
CALF USA members continue to use the commodities futures market in an effort to manage
their risks associated with the cost of producing and feeding live cattle. And, some R-CALF
USA members have ceased using the commodities futures market altogether due to the
inexplicable volatility in the market, aberrations in the market that they attribute to manipulation,
and their belief that the futures market is no longer responsive to fundamental supply and
demand signals.David Stawick, Secretary, CFTC
April 26, 2010
Page 2
The CFTC Should Apply Reforms Recommended for Energy Contracts to
Agricultural Commodities
A. The Futures Market for Live Cattle Is Broken
R-CALF USA believes the commodities futures market is fundamentally broken and no
longer functionally capable of serving as an effective, economic risk management tool for U.S.
cattle producers. Rather than to provide true price discovery, the live cattle futures market has
become a device that enhances the ability of dominant market participants to manage, if not
outright manipulate, both live cattle futures prices and cash cattle prices.
Evidence that the live cattle futures market is no longer functionally capable of serving as
an effective risk management tool for U.S. cattle producers includes data that show the physical
hedgers share of the long open interest in the feeder cattle futures market and the live cattle
futures market declined from 52.4 percent and 67.6 percent, respectively, in 1998 to only 17
percent and 11.7 percent, respectively, in 2008.1 Such a drastic decline in the physical hedgers
open interests in just a 10-year period in these commodities show either or both that commercial
(i.e.,
bonafide
hedgers) interests are now avoiding the futures market (which they would not do
if the market served an economically beneficial function) and/or speculator interests have now
besieged the markets once dominated by actual sellers and buyers of the commodities.
Evidence, albeit anecdotal, that the cattle futures market is subject to undue influence by
dominant market participants includes market events that occurred in October 2009. On the last
trading day before the October 2009 futures contract expired, some outside force broke the
October board, causing it to fall by the full $3.00 limit to $81.65 per cwt. However, the live
cattle trade was at $87.50, resulting in an unexplained convergence that is suggestive of direct
manipulation.
United States cattle producers sell their cattle into one of the most highly concentrated
marketing structures in the U.S. economy - one that has exceeded levels generally considered to
elicit non-competitive behavior and adverse economic performance.
2
Today, the four largest
U.S. beef packers purchase and slaughter about 85 percent of all slaughter-ready U.S. steers and
heifers.
3
Inherent to this high level of market concentration is substantial disparity between the
1 See
The Accidental Hunt Brothers: How Institutional Investors Are Driving Up Food and Energy Prices, Michael
W. Masters and Adam K. White, CFA, Table 10: Commodities Futures Markets - Long Open Interests
Composition, July 31, 2008, at 34, available at h_Rp://accidentalhuntbrothers.com/wp:
content/uploads/2008/09/accidental-hunt-brothers-080731.1L_~.
2 See
A Review of Causes for and Consequences of Economic Concentration in the U.S. Meatpacking Industry,
Clement E. Ward, Current, Agriculture Food and Resource Issues, 2001, at 1.
3 See UnitedStates ofAmerica et al. vs. JBS&A. et al.,
Amended Complaint filed on Nov. 07, 2008, U.S. District
Court, Northem District of Illinois, Eastern Division, Civil Action No. 08-CV-5992, (The U.S. Department of
Justice alleged, "Defendants [JB S S.A. and National Beef Packing Company, LLC] plus Tyson and Cargill together
purchased over 85% - nearly 24 million- of these [fed] cattle.") at 3.David Stawick, Secretary, CFTC
April 26, 2010
Page 3
economic power of the hundreds of thousands of disaggregated U.S. cattle producers (i.e., cattle
sellers)
4
and the economic power wielded by very few beef packers (i.e., cattle buyers).
As a result of this significant economic disparity, cattle producers, some of whom
continue to rely on futures markets to offset price risk, are vulnerable to any market distortions
caused by beef packers that may not only participate in the futures market as physical hedgers,
but as significant speculators as well. The cattle futures market is susceptible to downward price
movements - in contradiction of supply/demand fundamentals, when, e.g., beef packers, who
may hold a physical hedging position in the market, also engage in substantial speculative short
selling of the market. The effect of the beef packers' speculative short selling is to lower not only
the futures market price, but also the cash spot market price, which is intrinsically tied to the
futures market.
It is R-CALF USA's belief that futures market prices directly and significantly influence
prices for all classes of cattle, including fed cattle, feeder cattle, stocker calves, and breeding
stock, regardless of whether or not these cattle are included under any futures contract. For this
reason, it is imperative that the futures market be protected from unfair, manipulative, and
speculative practices that effectively distort otherwise competitive cattle prices.
B. The Cattle Futures Market Must be Protected from Manipulation by
Speculators With a Vested Interest in the Prices for Cattle
R-CALF USA believes the ongoing distortions to and manipulation of the cattle futures
markets, particularly those we believe are perpetrated through speculative short selling by one or
more dominant beef packers and/or other concentrated/dominant trader, can be rectified by the
Proposed Rulemaking's provision that traders holding positions pursuant to a
bona fide
hedge
exemption would be prohibited from also trading speculatively.
~
To be effective, this provision
would need to apply to any subsidiary, affiliate, or otherwise related entity of the
bona fide
hedger, particularly with respect to a dominant beef packer.
C. The Cattle Futures Market Must be Protected from Distortions Caused by
Excessive Speculation
Like other commodity futures markets, the futures market for live cattle is highly
susceptible to market distortion should excessive liquidity be introduced in the form of excessive
speculation. The remaining participants in the U.S. live cattle industry, whose numbers have
4 There were 967,000 U.S. cattle operations in the U.S. in 2007.
See
Farms, Land in Farms, and Livestock
Operations, U.S. Department of Agriculture, National Agricultural Statistics Service, Sp Sy 4 (08) a, February 2008,
atl4.
See
75 Fed. Reg., 4159.David Stawick, Secretary, CFTC
April 26, 2010
Page 4
already been reduced by an alarming 40 percent since 1980,
6
operate on slim margins and are
highly vulnerable to even small changes in cattle prices.
7
As a result, cattle producers are
particularly susceptible to financial failure caused by both market volatility and market
distortions created by excessive speculation that can swing prices low, even for short periods, as
they are operating in an industry already suffering from a long-run lack of profitability. In
addition, small to mid-sized cattle producers do not have sufficiently deep pockets to cover
margin calls associated with market volatility caused by excessive speculation, which, we
believe, has rendered the cattle futures markets incapable of serving as an effective risk
management tool for the small to mid-sized producer and is contributing to the ongoing exodus
of these producers from the U.S. cattle industry.
R-CALF USA believes the ongoing distortions to the cattle futures market, particularly
those we believe are created by excessive speculation, can be rectified by the Proposed
Rulemaking's provision that would limit speculative positions by index funds and other trading
entities that have no specific interest in the underlying commodity and bear no risk relative to the
commodity' s production or consumption. To achieve the goal of effectively preventing excessive
speculation, which is known to facilitate abrupt price movements and price distortions in other
futures markets,
8
we are inclined to agree with the recommendation made by Michael W.
Masters:
As a general rule of thumb, speculators should never represent more than 50% of
open interest, because at that level, they will dominate the price discovery
function, due to the aggressiveness and frequency of their trading. The level I
recommend is 25%; this will provide sufficient liquidity, while ensuring that
physical producers and consumers dominate the price discovery function.
9
D. The Cattle Industry Must be Protected from Distortions In Feed Grain
Prices Caused Also by Excessive Speculation
Because feed grains are a major component of production costs for fed cattle, the price of
feed grains is a major consideration by
bona fide
hedgers when formulating expectations for
future cattle prices. If feed grain prices are expected to rise - thus increasing the cost of cattle
6
The size of
the U.S.
cattle industry, as measured by the number of cattle operations
in the U.S.,
declined from
1.6
million in 1980 to 983,000 in 2005 and further declined to 967,400 in 2007.
See
Fed. Reg. Vol. 72, No. 152,
Wednesday, August 8, 2007, at 44,681, col. 2.
7 See
A Review of Causes for and Consequences of Economic Concentration in the U.S. Meatpacking Industry,
Clement E. Ward, Current Agriculture Food and Resource Issues, 2001, at 2 ("[E]ven seemingly small impacts on a
$/cwt. basis may make substantial difference to livestock producers and rival meatpacking firms operating at
the
margin of remaining viable or being forced to exit an industry.").
See, e.g.,
75 Fed. Reg., 4148, col. 3.
9 Testimony of Michael W. Masters, Managing Member/Portfolio Manager, Masters Capital Management, LLC,
before the Commodities Futures Trading Commission, March 25, 2010.David Stawick, Secretary, CFTC
April 26, 2010
Page 5
production - without a corresponding expectation that beef prices also will rise, cattle feeders
will attempt to offset the expectation of higher feed grain prices by purchasing feeder cattle at
lower prices. The relationship between feed grain prices and cattle-feeder profitability has long
influenced pricing decisions by
bonafide
hedgers. If, however, feed grain prices are themselves
subject to non-market forces such as excessive speculation, as they were during the 2008
commodity bubble, the profitability of cattle feeders can be immediately affected. And, this lack
of profitability, or reduced profitability, immediately translates into a perception that feeder
cattle must be purchased at lower prices to offset the resulting increase in production costs. Thus,
distortions in futures feed grain prices result in distortions to cattle futures prices and must be
eliminated. R-CALF USA believes that effective speculative position limits imposed on all feed
grain commodities markets would alleviate the transference of market distortions from the feed
grains futures market to the cattle futures market.
II.
The CFTC Should Consider Additional Reforms to Protect the Integrity of
the Cattle Futures Market
The CFTC must ensure that the cattle futures market is always dominated by
bonafide
hedgers. In addition, the CFTC should strictly curtail, if not completely eliminate, the practice of
allowing passive speculation in the commodities futures market by entities that hold large market
positions without any interest in the underlying commodity and without any risk relative to the
commodity's production or consumption. We further believe it important that the CFTC
recognize the two types of excessive speculation that has invaded the cattle futures market: 1)
the excessive speculation by one or more dominant market participants with market shares
sufficient to engage in market manipulation (this can include dominant beef packers acting
speculatively as discussed above or any other concentrated/dominant speculator), and 2) the
excessive speculation by those without any vested interest in the underlying commodity and
without any risk relative to the commodity's production or consumption (including both active
and passive speculators). Both of these types of excessive speculation contribute to market
distortions that are harmful to
bona fide
market participants, as well as to consumers who
ultimately consume products derived from these commodities.
To achieve the optimal level of liquidity provided by speculators, it would be important
that the actual speculative position limits for one or more concentrated/dominant speculators and
the overall actual limit of speculation in the cattle futures market be established by
bona fide
hedgers in the futures market and adjusted by them from time-to-time as conditions may warrant.
Further, we believe the CFTC should restore daily market price limits to levels that minimize
market volatility. The previous daily market limit in the cattle futures market of $1.50, which
could still be adjusted upward following extended periods of limit movement, resulted in far less
volatility than the current $3.00 daily market limit. Finally, we seek a reform to the practice of
allowing cash settlements on futures contracts in lieu of actual delivery of the commodity, a
practice that effectively lowers the cattle futures price on the day of contract expiration.David Stawick, Secretary, CFTC
April 26, 2010
Page 6
III. Conclusion
We look forward to working with the CFTC to eliminate manipulation and other
practices that have caused artificial price distortions in the commodities futures market and
relegated the cattle futures market to an ineffective tool for price discovery and risk management
for U.S. cattle producers. We appreciate the CFTC's Proposed Rulemaking that acknowledges
many of the key factors that have contributed to the commodity futures market's perverse
outcome and we encourage the CFTC to take the additional steps recommended above to ensure
that the commodities futures market can function as a meaningful price discovery and risk
management tool for the U.S. cattle industry.
Sincerely,
Bill Bullard, CEO
