An Iowa congressman yesterday said he found a secret "signal" that predicts "with 100 percent accuracy" when prices will fall on the cattle futures market.
The signal has been given 29 times in the past three years, and every time cattle futures prices dropped within an average of two and a half days, charged Rep. Neal Smith (D-Iowa).
A speculator who knew the signal could have made $4.7 million, said Smith, who has been complaining for years that speculators are manipulating the cattle futures markets to the detriment of midwestern farmers.
The signal that marks the turning point in the market was uncovered by John Helmuth, an economist for the House Small Business Committee. Smith was chairman of the committee until this year, when he gave it up to head the Appropriations Subcommittee on State, Justice, Commerce and the Judiciary.
Helmuth came upon the technique while studying the futures market activity of a group of executives of packing houses, grain companies, feedlot operators and commodity brokers who have been extraordinarly successful in trading cattle futures.
Last fall Helmuth issued a study showing 32 industry insiders made cattle-trading profits of $1.10 million in a 16-month period. Between January 1978 and April 1979, the 32 made an average of $3.4 million each in a business in which most traders lose money.
Much of their profit was made by selling cattle futures just before prices dropped, then buying the contracts back at a lower price.
By studying confidential records of the Commodity Futures Trading Commission, the government economist found a tecnique for predicting when prices would fall.
The figures used in the technique are all public information.
Smith has turned Helmuth's research over to the CFTC and urged the agency to shut down the cattle futures market because it serves no economic purpose. Smith also has introduced legislation forbidding meat industry insiders from speculating in the futures market.
Smith charged that meat industry insiders, by following the signal and selling futures contracts all at the same time, create a snowball effect that forces down cattle prices.
Giant corporate feedlots, which raise as many as 50,000 head of cattle, have cheaper operating costs than the small midwestern feeders whose costs are reported by the USDA. When the big feeders see Chicago Mercantile Exchange prices approach the USDA figures, they can afford to sell first, driving down the price before the small feeders get into the market, Smith said.
Chicago Mercantile Exchange President Clayton Yeutter said it is "very natural and logical" that cattlemen should sell when prices reach the point where it is profitable to do so.
The complaints about the cattle futures markets are "typical Neal Smith demagogery," Yeutter said, contesting Smith's claim that prices can be forseen by formula. "If he's got a system that makes those kinds of predictions with 100 percent accuracy, he ought to copyright it and make a few million dollars."