Ulmer is lobbying for change in cattle marketing
February 2, 2017
Kim Ulmer is on a mission.
The co-owner of Huron Continental Marketing and president, CEO of Livestock-R-Us LLC, located in Huron, S.D., wants to change the way cattle are marketed and sold in the U.S.
"Every producer needs to know why our markets crashed to 50 percent of what they were two years ago, with only a 1 percent increase in American livestock," Ulmer said.
Economists have yet to agree on the factors that resulted in the sharp decline in cattle prices in recent years, Ulmer suspects the crash largely has to do with the Chicago Mercantile Exchange.
"The CME is a globalized board of trade, with 700-plus stockholders who collectively have more than $29 billion in assets," Ulmer said. "It's a self-regulated organization with billionaires creating false values in the markets because there's no delivery requirements for contract and there are no trading limits."
Since spring of 2016, Ulmer has traveled the country speaking about his frustrations with the CME to various cattlemen's groups including R-CALF USA, South Dakota Cattlemen's Association, I-BAND, I-CON and South Dakota Stockgrowers Association.
"Every group I spoke with shared the same frustrations about the cattle markets," Ulmer said. "I fear the cattle industry is going to follow down the same road as the hog industry. In 1960, we had 644,882 small family hog farmers in the U.S. By 1980, new government regulations allowed for mega farms and large corporations to take over, and by 1987, only 236,973 hog farmers remained in business. By 1994, that number had dropped to under 150,000. In 2007, hog producers numbered 74,698. In 2016, nine out of every 10 family hog farm has gone out of production as large corporations now own the lion share of the hog industry."
CONTROLLING THE MARKET
Ulmer points out new trends that pinpoint how large corporations are now seeking to gain market share of the beef industry, and the CME, which is promoted as a risk management tool for producers, is the way they are controlling the cattle markets.
"The big money corporations have learned how to create market control methods like they used in the hog industry, and they want the same thing to happen in the cattle industry," Ulmer said. "Years ago, the government regulators let the CME board of trade change the mercantile system from asset-based commodities futures with delivery to a commodity-trading format without an asset or delivery. This gives large corporations and speculators a huge advantage in the trading market."
Ulmer has taken his frustrations to Washington, D.C., and he's authored the "Protect the Producer CME Survey," and has gotten 622 completed surveys sent to him to present to the state's elected officials on his next trip. So far, findings of the survey show:
65 percent of respondents do not know that the feeder board has no delivery policy.
97 percent said they do not feel the CME is a safe risk management tool for producers.
70 percent did not know that the feeder board is a global trading format and that anyone in the world can trade and value a livestock producer's product, for about 3 percent of the actual cost that producers pay for a load.
71 percent did not know that there aren't volume limits on live and feeder board contracts. In fact, they can sell any amount of feeder cattle, far more than there are produced, Ulmer said.
77 percent do not know that the first page shows what is called the "CME Feeder Cattle Index."
90 percent think there needs to be changes made to the CME trading rules.
97 percent think each trade should be backed by an asset with delivery options.
98 percent feel the current trading system is more like gambling than futures trading.
83 percent do not understand the new high-frequency trading.
One survey participant from Montana wrote, "The CME board of trade has no basis of reality to the livestock industry. The traders should pay the actual cost of the load plus feed costs on actual feeder cattle. The CME is nothing more than a glorified casino."
Another rancher from Nebraska wrote, "It is a rigged system that does nothing to help the small producer and gives false signals of the market. It's nothing more than illegal gambling."
A California rancher responded, "The CME is deceitful, shameful and no longer relevant. Trades should be backed with actual product! If we sell animals we don't own, we go to jail! Currently, the big packers are controlling the markets with low fat cattle and high retail. Where are our representatives?"
This winter, Bill Kluck, South Dakota Stockgrowers Association president, traveled with Ulmer as he spoke at six regional R-CALF USA meetings. He shares Ulmer's concerns about the CME.
"Feeders used to rely on the CME board of trade as a risk management tool, but with the volatility of the markets, it's no longer the useful tool it was created to be," said Kluck, who ranches near Mud Butte, S.D. "In our investigation of the CME, we found that the hedge funds that used to be heavily involved in the commodity market have pulled out and have consequently created a path for packers to control the board of trade. The whole thing needs to be restructured, and I think Kim is correct in what he is trying to accomplish."
Kluck added, "I'm very concerned about the cattle industry because of the loss of so many cattle feeders. Today's cow-calf producer isn't doing so well either. According to the USDA, basis input costs for a calf raised in my area are $756, but if you are going to make money on the calf, you need $1,188 when considering the investments in the cow, machinery, land prices, taxes, etc. We can't operate these ranches when expenses go up ten-fold but prices don't follow."
Todd Wilkinson, past president of the South Dakota Cattlemen's Association and a feeder from DeSmet, S.D., has been actively working on this issue by serving on the National Cattlemen's Beef Association's CME working group.
"Everybody shares the same concerns about the volatility that exists with the CME; however, the causation isn't as easy to tack onto one issue," Wilkinson said. "The biggest thing we need to do is keep the CME engaged in the discussion process. In the last year, they have become much more receptive to listening and making changes than they were when we originally approached them."
Wilkinson believes there are many variables that have contributed to problems with the CME, ranging form delivery point issues, to computer algorithms, to inadequate price discovery due to formula-driven sales in the southern market.
"One issue we are seeing is with computer algorithms, speculators can get in and out of the market so fast that the person who is trying to do risk management with CME products isn't able to do it effectively because some hedge fund owns a balanced basket of commodities and can reallocate funds based on parameters that they set," he said. "They don't care what the cattle market is doing; they are simply rebalancing based on other criteria. As a result, we are getting caught in that trap."
Wilkinson credited Superior Livestock Auction's new product, the Fed Cattle Exchange, which he says is providing better price discovery.
"This tool was designed more than anything else to increase price discovery, and it helps address the problems that Kim is talking about, as well," Wilkinson said. "What Kim is doing is helping people to open their eyes and see what is going on. When people start asking questions, that's always a good thing."
Meanwhile, Ulmer is working to start his own American Mercantile Exchange, and he hopes producers will get involved.
"Call your senators and representatives to help bring awareness to this issue," Ulmer said. "Join a cattlemen's group that you feel is working hard on your behalf and get involved. Become part of the Protect the Producers movement and help us get surveys filled out."
Surveys are available online at http://www.livestockrus.com. ❖