By Cassie Fish,Â CassandraFish.com
Now that the dust is settling after one of the worst breaks in cattle market history, folks are beginning to reflect about how such a huge break could occur in such a short time frame without an outside influence such as a disaster, government intervention or other similar event.
Itâ€™s true, sell-offs in certain commodities are always faster and more violent than rallies while in other markets, such as corn the opposite tends to be true- blow-off tops and saucer bottoms. When distilled down to the essence, itâ€™s the perception of both â€œtoo muchâ€ or â€œnot enoughâ€ and the intrinsic needs tied to the very commodities themselves.
But a $20 sell off in under a month, which was just experienced in live cattle futures, was extreme. Â There have been some fundamental changes in the way both the futures and physical businesses are conducted and both likely contributed to the debacle.
Â Â Â Â Â Â Â Â The Machines
High Frequency Trading or HFT as it is known, is now commonplace and legal and found in equities, bonds and commodities. Post-2009, big companies spent big bucks on computer-related hardware and software to trade markets faster than before. Faster than humans. The motivation was simple, to make money. Big firms funded HFT and benefit financially as do the exchanges who clear the trades.
The investor, hedger, individual risk taker on the other hand canâ€™t compete with the speed of the machines. The velocity of the price movement in the face of no logical explanation in of itself puts human market participants â€œback on their heelsâ€ which only contributes to the problem. Fear and panic follow next and a race to some sort of bottom or top is on. The extinction of the pit and floor trader/risk taker can be especially felt in a smaller market like cattle futures where small players are literally overrun by this new breed of wolves on Wall and LaSalle Streets.
This is not a cattle market issue this is a marketplace issue. Michael Lewis wrote a book about it, â€œFlash Boysâ€; CBS did a piece about it on 60 Minutes. You can find plenty of folks on Twitter who tweet about it daily. CNBCâ€™s Rick Santelli has ranted about it. Itâ€™s an issue that crosses boundaries, impacts millions. And itâ€™s legal.
Â Â Â Â Â Â Â Â The Other Shoe
On the physical side, the well-known migration of committing cattle to a packer versus negotiating a price gives the packer more leverage. He has less to buy each week.
Secondly, the packing industry made tough decisions in the past 10 years to close plants and reduced fed cattle slaughter capacity a whopping 90,000 head. The packer took write-downs, laid off folks and altered their operations and the upside for them is they can run minimal hours if they are losing money. The industry experienced that first hand this summer when reduced weekly kills proved inadequate to retain currentness in feedyards.
Thus, the loss of currentness of fed cattle marketings by cattle feeders carries a tougher penalty than in the past.
We already know there are other factors that contributed to the cattle market decline, but the enormous break in such a short time frame wonâ€™t be quickly forgotten, and was a cruel reminder about how much things have changed in a few short years.