Commodity Futures Trading:

Purpose, Use, Impact, and Regulation of Cattle Futures Markets

RCED-88-30: Published: Nov 10, 1987. Publicly Released: Nov 10, 1987.

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John W. Harman
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Pursuant to a legislative requirement, GAO investigated cattle futures markets and their impact on cash market prices for cattle, particularly the: (1) cattle markets' reaction to the Department of Agriculture's (USDA) Dairy Termination Program; (2) effect on cattle prices of meatpackers' forward contracting; (3) effectiveness of the system for delivering cattle under live cattle futures contracts; and (4) effectiveness of public and private regulation of the cattle futures markets.

GAO found that: (1) while cattle futures markets need some improvements and more research, they are serving their economic purpose of enhancing price discovery and facilitating risk-shifting; (2) there was no evidence to indicate that cattle prices were lower than they would be without futures markets; (3) trading in cattle futures is more prevalent in the feeding and meatpacking segments of the cattle industry than in the ranching segment; (4) a USDA announcement of its Dairy Termination Program produced a greater-than-expected drop in cash and futures prices for cattle, because USDA failed to anticipate the announcement's effect or coordinate with Commodity Futures Trading Commission (CFTC) officials; (5) meatpackers procured about 9 percent of their cattle through forward contracts, with no adverse price effects on the cash or futures markets; and (6) although problems exist with the delivery system and the grading of delivered cattle, commodities exchanges are developing better delivery and settlement mechanisms.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: CFTC reported the results of a special call survey in February 1988 for live cattle futures, live cattle options, feeder cattle futures, live hog futures, and live hog options. It also instituted a monthly advisory report as a supplement to the Large Trader Reporting System Monthly Report. CFTC plans to use the special call procedure in the future as needed, based on a review of market factors.

    Recommendation: The Chairman, CFTC, should use the special call procedure more frequently, particularly with regard to futures markets, such as those for cattle, that are the focus of considerable interest and attention.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: Working contacts were established between ASCS and CFTC. Another procedure is being developed for additional monitoring and surveillance of commodity markets. The World Agricultural Outlook Board (WAOB) will be the liaison with CFTC, and analysts from WAOB and ERS will participate in CFTC weekly monitoring on surveillance briefings when agricultural commodities are included.

    Recommendation: The Secretary of Agriculture should direct USDA futures-traded commodity program officials to discuss and coordinate their plans with appropriate CFTC officials. This would ensure a greater degree of sensitivity among program officials to the possible effects that the programs they are implementing or modifying might have on related commodity markets.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: P&SA will continue to monitor meat packer mergers, other transfers of ownership and control, plant capacities, and plant openings and closings. A database of major steer and heifer slaughtering firms and their respective plants is used to continually measure concentration in steer and heifer slaughtering and fabrication.

    Recommendation: The Secretary of Agriculture should ensure that the Packers and Stockyards Administration (P&SA) monitors closely the increasing level of concentration in the U.S. meatpacking industry, to determine its impact on cattle markets, and take any actions necessary to ensure a continued fair, open, and competitive marketplace. Such actions might involve seeking information and advice from, and coordinating with, the Federal Trade Commission, the Department of Justice, and to the extent necessary, CFTC.

    Agency Affected: Department of Agriculture


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