R E D M E AT R E P O R T Copyright 2016 Christopher Boswell / Adobe Stock Analysts agree, the futures should not be ignored BY S T E V E K AY | m e a t p o u l t r y @ s o s l a n d.c o m T he US beef industry is being roiled by the worst market chaos since the US reported its first BSE case on Dec. 23, 2003. The chaos has nothing to do with an animal disease or food safety breakdown. The culprit is a futures market that has behaved irrationally for the past 18 months. Market participants and analysts agree the futures are not functioning as they should as a risk management or price discovery tool. Yet all are at a loss as to what to do. The feeling that the futures were out of step with supply and demand fundamentals began early last year. The live cattle contract traded well below the cash market, which forced futures prices to rally just before a contract expired. Then came a futures sell-off last fall that caused a dramatic collapse in cash prices. The futures market is an anticipatory 18 MEAT+ POULTRY | 08.16 | www.meatpoultry.com market. So one might say its sell-off last fall was justified because of concerns about slow feedlot marketings, which resulted in steer and heifer carcass weights reaching record highs in October and November. But most market participants felt the futures had greatly exaggerated the impact of these factors. Almost as alarming was the futures' volatility throughout the year, advancing sharply one day only to sell off the next. Such aberrant behavior played havoc with cattle feeders' ability to hedge cattle they were placing on feed, and on packers' ability to sell forward beef at prices they could hedge against the futures. The first three months of this year brought some respite from the volatility although the live cattle contract remained deeply negative to cash prices. However, irrationality returned in June. In just two weeks, the June live cattle contract lost 795 points in six trading days. This caused cash live cattle prices (basis US Dept. of Agriculture's 5-area average steer price) to decline $10.78 per cwt and for cattle feeders to lose an estimated $145 million. This losshttp://www.meatpoultry.com