Commodity Futures Trading

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

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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