Mad Cow News Roils Futures Market

04/27/2012 9:55 am EST

Focus: FUTURES

Andy Waldock

Founder, Commodity & Derivative Advisors

As with past occurrences, the recent mad cow outbreak has caused panic selling in the futures market, writes Andy Waldock, but the news-driven selloff could prove a worthwhile buying opportunity.

Mad cow disease comes in two forms, typical and atypical. The typical version is the communicable disease that results from improper animal husbandry and feed issues. The communicable type leads to Creutzfeldt-Jakob disease in humans.

The human cases in the US were sourced to the consumption of British and Saudi Arabian products in 2003. The ’03 outbreak also marked the start of declining herd sizes, as well as country-of-origin labeling.

Atypical bovine spongiform encephalopathy is a random genetic mutation that does not spread from cow to cow. This is the type that was discovered at a transfer station in Hanford, California this week and provided the catalyst for this week’s buying opportunity in live cattle futures.

Its detection was due to the increased controls, labeling, and testing methods put into place after the 2003 Canadian scare.

The definition of “atypical” by the Department of Agriculture suggests that this is a random mutation that occurred genetically.

The key here is the reaction to the news. Based on our history, the images we’ve seen on TV, and the Oprah Winfrey special in 1996, the knee-jerk reaction has been to stop beef imports, quarantine the population it came from, and eat more chicken.

The 2003 episode, which saw one reported case of Creutzfeldt-Jakob’s disease, brought the Canadian beef market to its knees. Canadian cattle prices fell by more than 85% and led to the mass liquidation of approximately 20% of the nation’s animals to reduce the herd size and prevent further damage to the industry.

However, the response to the headline news is not always indicative of the true story. Atypical forms of this disease confine the issue to the individual animal. Therefore, neither the herd’s nor the public’s health is actually affected. In fact, cases of mad cow have declined from over 37,000 in 1992 to less than 30 in 2011.

The controls and husbandry practices have dramatically improved in a business that is dominated by…India! Yes, India has the largest cattle herd in the world. India has nearly twice the cattle we have in the US.

It’s funny what happens when you search for global cattle herds rather than global cattle slaughter. I assume Indian cattle live longer. Mad cow is passed to people through the consumption of infected meat. Therefore, Brazil leads the pack at 10.7 million head processed and the US comes in third at 5.7 million.

There have been eight reported outbreaks or cases of mad cow since the information age took hold. The last typical outbreak in the US occurred in 2006 and sent prices plunging by 11%. The average decline for an outbreak of the typical variety is 6.4%. The last observation was atypical and presented itself last March. The story unfolded with a knee-jerk selloff, followed by a rally as the truth became known. The net market movement for the event was a rally of nearly 4%.

The current scenario is playing out in the same fashion. The day the news was reported, the market closed limit down. The following morning’s headlines included a ban on US beef by South Korea, the US’ fourth-largest importer. This also comes at a time when the US is actively trying to negotiate with Japan to lift the import restrictions on US beef. Japan was the US’ number-one importer prior to the 2003 mad cow episode.

Headlines being what they are, we’ll watch the market for signs of a turnaround and look to buy live cattle on this news-induced selloff. 

By Andy Waldock of Commodity and Derivative Advisors

Related Articles on FUTURES