After reaching a high of $112.375 – the highest for a closest-to-expiration contract since CME launched cattle futures in 1964 – February live cattle futures fell today to the equivalent of $108.80 per hundred points. The price hit a previous record of $107.05 in September 2008 during the commodity bubble that sent crude oil up to $150 a barrel. Drovers CattleNetwork writes,
CME Group traders such as Jim Sauter say cattle prices have climbed above levels justified by current supply and demand patterns. While the total U.S. cattle inventory is near the lowest on record, beef production actually increased last year because of heavier animals, Sauter noted.
Additionally, growing concern over food inflation has propelled a flood of speculator money into grain and livestock futures, setting markets up for a repeat of 2008, when prices surged before tumbling sharply, Sauter said…
As in 2008, hedge funds and other speculators were heavy buyers in grain and livestock futures over the past year. Swap dealers and managed money, the two largest categories of speculators tracked by regulators, held 34 long positions for every one short position in CME feeder cattle futures last week.
In another gauge of investor bullishness, the speculator net-long position in feeder cattle futures and options totaled 18,622 contracts for the week ended Jan. 11, according to the U.S. Commodity Futures Trading Commission. That was the largest net-long position in feeder cattle since at least June 2006, when the CFTC began tracking the data, according to Bloomberg News.
Finally, this really sums up what is happening across almost all commodity markets,
“This is bizarro world,” Stanley said yesterday. Cattle futures are “probably $4 to $5 overpriced. We’re a house of cards here.”
In my upcoming book, Oil’s Endless Bid, due out from John Wiley & Sons in March, I argue that financial influences from investors and traders and the massive growth of derivatives markets have been the single most important factor for oil’s high and unreliable price, far outstripping fundamental arguments of emerging market growth, peak oil or any other supply constraints or a devaluing dollar.
Putting some controls on at least some of these speculative influences was supposed to be one of the goals of Dodd-Frank, but the actual rule-making to put teeth behind the legislation has been left to the Commodity Futures Trading Commission (CFTC). Since it began tackling this massive job in July 2010, the CFTC has literally been buried by the pushback from industry lobbyists, hired-gun lawyers, derivatives broker/dealers and virtually every industrial corporation with a trading desk that depends even marginally on derivatives activity to protect or augment profits.
Wow! You think the Tea Party was a political force in the last elections? If the public gets whiff and internalizes what Dicker argues here as they pay ever higher prices for their steak and hamburger, and spend $100 for a tank of gas, the Administration and Congress better start thinking Tunisia! Long political risk!