Beef futures prices could fall even faster Tuesday than they have over the past week.
The Chicago Mercantile Exchange took the unusual step of adopting a second set of adjusted daily price limits after cattle futures fell Monday by the maximum amount allowed. It was the third straight trading day that prices fell the limit.
The reaction to the discovery of a single dairy cow with bovine spongiform encephalopathy–a fatal illness known as mad cow disease–in Washington state has been swift. Japan and other foreign markets have stopped accepting U.S.-bred beef, while a meat recall is under way in Western states.
Both live and feeder cattle closed down 5 cents a pound Monday. Since Dec. 23, beef futures have lost almost 10 cents a pound.
February live cattle closed at 81.17 cents a pound Monday, while January feeder cattle closed at 85.72 cents a pound.
On Dec. 24, the Merc announced a series of expanded price limits to allow prices to fall faster than the normal maximum of 1.5 cents a pound each day. On Monday, new temporary limits were announced. Prices will be allowed to fall up to 5 cents per pound. Then, if that level is reached, after one hour the limit will be expanded to 7.5 cents for the remainder of the trading day.
Limits are placed on how quickly agricultural commodities can rise or fall to prevent “excessive speculation,” said Paul Peterson, the Merc’s director of commodity product development. When unusual circumstances are present, expanding the limits helps ensure the market can adjust to be more in sync with the cash market, Peterson said.
Temporary changes in the limits work in both directions. In October, in response to unprecedented increases in beef prices, the Merc temporarily raised the daily limit.
Analysts predict that there will be trading Tuesday, after nearly a week with nearly no action in the cattle trading pits because there were no buyers. There has been activity in the cattle options markets–a trade that gives the purchaser the right, but not the obligation, to exercise a futures contract at a predetermined price on or before a specified date.
The movement in the options market means the futures market is ready to start trading, said Richard Brock, president of Milwaukee-based Brock & Associates, a commodity advisory firm. “We’ll have probably a fairly normal trading day,” he said.
Other markets have also been affected. Soybean futures prices at the Chicago Board of Trade were up last week, after the mad cow discovery had some investors speculating that the United States might ban the use of beef products in animal feed.
The disease is believed to spread through contaminated animals being turned into feed for other animals. “The thinking was what we might do is follow the path that some other countries have done, and ban meat and bone-meal feeding from all livestock, including chicken and hogs,” said Vic Lespinasse, grain analyst for A.G. Edwards & Sons at the Board of Trade.
That could mean several million tons of soybeans needed to replace those animal products as a source of protein in feed. But soybean prices fell after it was discovered the infected cow came from Canada, loosening pressure to reform U.S. feed rules, Lespinasse said.
While the mad cow discovery has rocked the beef industry and caused movement in agricultural commodity prices, its impact on the nation’s economy is virtually nil, said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago.
“If this was water, we’d have a problem,” Wesbury said. “But because we can buy pork or chicken or fish or venison–overall spending is unlikely to decline.”
Wesbury predicts beef prices could eventually fall 30 percent before leveling off. “But this is not as big a loss as it would appear,” he added.
Live cattle futures prices had passed $1 a pound in late October and were trading in the high 90-cent range earlier this month. “We’re looking at a 30 percent drop in prices from multiyear highs,” Wesbury said.
