It’s Up to Cattle Producers to Decide
November 13, 2024
Op-Ed by Gilles Stockton, Montana Cattlemen’s Association Director
As long as cattle producers’ demands for the restoration of honest price discovery in the fed cattle market was still just that, a demand, we did not need to come to a consensus about how this could actually be accomplished. In an advanced notice of rulemaking, “Price Discovery and Competition in Fed Cattle Markets,” USDA has finally acknowledged that price discovery is indeed broken and has, in essence, put the baby back into our hands. It is now up to cattle producers to tell USDA exactly how fed cattle markets should be structured so that they are accurate, honest, and transparent.
In the words of the advanced notice of rulemaking: “The purpose … is to solicit feedback on an identified set of regulatory options that AMS (Agricultural Marketing Service) could employ to address concerns regarding price discovery and fairness in fed cattle markets.” According to USDA’s research, in 2005 the dominant meatpackers procured about 55% of their cattle through cash negotiations and 30% through Alternative Marketing Agreements (AMAs or captive supply). By March 2021 the cattle procured through cash negations fell to under 20% while captive supplies increased to 65%. That is the national average; in the Kansas marketing region it fell to 12.5%, in the Colorado region it was 8.3%, and in Texas the cash market fell to as low as 2.6%. Incidentally, over that same time period we lost more than 80,000 independent feeders, seriously shrinking the number of potential bidders for those of us who sell feeder calves.
The options to restore price discovery come down to two basic choices – tinker with the existing system or transition to a better system. In the tinkering option we would need to mandate that more of the fed cattle be purchased in the negotiated cash market. This approach would also require enhancing mandatory price reporting. As for the other option, transitioning to a better benchmark, this would realistically come only through the adoption of electronic auctions.
The negotiated cash market has one fatal flaw – it is negotiated. In any negotiated market, where two parties barter in private, the party with the most knowledge always has the advantage. This can be mitigated to some extent by better market information. The current mandatory price reporting law requires that AMS protect the confidentiality of the meatpackers, thereby limiting what can be publicly reported. Can mandatory price reporting be enhanced and still maintain confidentiality, or should we instead forget about protecting the meatpackers’ confidentiality? I’m not sure. Only Congress and the Supreme Court can answer that. Although good market reporting is essential in cattle markets, reports are always after the fact. Reports cannot tell you what the market is at this minute.
That is the beauty of auction markets; they are in real time and transparent. At least they are transparent if there are a sufficient number of buyers. Physical auction yards work well for feeder cattle and cull cows but are cumbersome for fed cattle. The fats have to be transported directly to the slaughterhouse or else considerable costs and risks can occur. Because of the logistical difficulties, only a small number of fed cattle are sold in stockyards. Feeders and meatpackers have, instead, opted to sell in the negotiated cash market, which is in essence a very short-term forward contract where the meatpacker buyer is allowed a few days before taking delivery.
An electronic auction, however, solves all kinds of problems. First, it’s an inexpensive. Central Stockyards, the only computerized market for fed cattle that I am aware of, charges just $3.00 per head. Central Stockyards currently offers three different sale options – live weight, bid the grid, or forward basis contract. However, other sale options would conceivably be possible if feeders and meatpackers see a need.
Although Central Auction currently focuses on short-term delivery (fourteen days), there is no reason electronic markets could not accommodate longer-term forward contracts not based on the futures market. This would provide all the benefits of an AMA and yet more. The seller would be guaranteed a base price adjustable at the time of delivery, a fixed delivery date, and very importantly, the sale would contribute to true price discovery because the numbers sold and the terms of the forward contracts would be instantly and publicly reported.
Another advantage to privately operated electronic auctions is that it requires minimal oversight from USDA. In contrast, mandating an increased usage of the negotiated cash market along with enhanced mandatory price reporting will require that the government police the market. However, if the cattle industry decides that we should transition to a better form of price discovery, realistically it cannot be done overnight. Inevitably it will take time.
Over that transition, the feeders and meatpackers will still need to use the negotiated spot market, but ideally for a greater percentage of weekly procurements. Can USDA mandate this or could it be accomplished by a voluntary agreement? Mandatory price reporting will also need to be enhanced. What kinds of reports will be most useful and will protecting meatpacker confidentiality still be required? Mandating enhanced market reporting in a manner that does not protect meatpacker confidentially would probably require action by Congress.
Then will we need to decide what kinds of incentives will be necessary to encourage feeders and meatpackers to transition to electronic markets? Finally, if we end up with some sort of hybrid system where the negotiated spot market is still in use, and in addition, electronic markets move a significant number of cattle, at what percentage of sales can we be assured that price discovery is optimized?
The meatpackers and their apologists will undoubtedly argue that only minor adjustments are necessary. Perhaps they will promise to buy more cattle on the negotiated spot market and acquiesce to enhanced price reporting. If we believe that this is sufficient, we shall only have kicked the can down the road. The industry will continue to hemorrhage independent feeders and we will eventually end up with only a handful of gigantic feeding companies run by private equity firms.
Furthermore, cow/calf producers will increasingly be required to use only meatpacker approved genetics and management practices. Step by step, ranchers will lose marketing options, thereby losing independence just like the chicken and hog producers. Only by standing firm and demanding that the industry transitions to true price discovery will there be a future in ranching for our sons and daughters.
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Gilles Stockton
Stockton Ranch
Grass Range, Montana
406 428-2183
gillesstockton@gmail.com