What’s in a price? Everything, if that price is of feeder or live cattle. The industry depends on reliable price discovery to provide a guide as to the value of cattle from ranch to packing plant. In normal times, prices are determined by the application of supply and demand fundamentals.
The past year though has been the opposite of normal. An Aug. 9, 2019 fire at Tyson Food’s Holcomb, KS, beef processing plant put the plant out of commission for most of the rest of the year. This caused a collapse in futures and cash live cattle prices. There was a marked drop in the number and percentage of negotiated cash sales of live cattle immediately after the fire. Then the COVID-19 pandemic struck the beef complex this spring, causing unprecedented market distortions in cattle and wholesale beef prices until early June.
The two events have led to new concerns about price discovery and transparency, and about the small percentage of live cattle sold on the cash market. Price discovery is strongest in sales of feeder and stocker cattle. They sell in three ways: live auction, direct sales and video sales. All sales were hard hit in March but had rebounded by May. Auction sales were down only 2 percent year-on-year and comprised the majority of sales.
Negotiated cash sales fell sharply after the Tyson fire and also at the height of the pandemic when beef plants nationally ran at only 68 percent of capacity. The fire led to Agriculture Secretary Sonny Perdue to direct USDA’s Agricultural Marketing Service (AMS) to conduct an investigation. He directed it to look for evidence of whether any regulated entities during the two events violated the Packers and Stockyards Act by taking advantage of the situation through price manipulation, collusion, restrictions of competition or other unfair practices. He then expanded the investigation to include the market’s behavior during the height of the pandemic.
Not unexpectedly, AMS in a recent report said it found no infringement by industry stakeholders related to either event. Much of its report instead focused on its efforts to continue to explore ways to enhance price discovery and transparency in the live cattle market. Its first suggestion is to reduce non-reporting. Colorado reports no live cattle sales due to confidentiality restrictions under mandatory price reporting. A combination or reshuffling of reporting regions, a change that could be made without legislative action, could ultimately expand the market data released to the public, says AMS. But it notes that there has not been industry consensus on such a recommendation to date.
USDA is also exploring the idea of no longer referring to the daily slaughter report as an estimate to encourage the market’s immediate use of the information. I can’t imagine how such a move would make any difference. Ironically, the six weeks of data from the first week of June saw 66,856 head fewer cattle in the actual weekly slaughter totals versus AMS’s initial estimated totals. That is reason enough for people to ignore the estimated total even more.
AMS has also explored a 14-day slaughter scheduled delivery submission requirement through livestock mandatory reporting (LMR), a precedent currently in place for daily LMR swine reporting. Beyond LMR, the concept of creating and compensating a pool of negotiated cash market traders has been explored by some in academia and industry, says AMS. With further development and discussion, the idea may prove an innovative and flexible approach to solving the public good problem of a lack of reliable price discovery, it says.
Cattle producers discussed these and other price discovery issues at National Cattlemen’s Beef Association’s summer meeting last week. I imagine they rejected any suggestions to force packers to buy a certain percentage of cattle on the cash market or other measures that would inhibit cattle feeders in selling cattle to packers any way they want.
So does the industry continue to tinker with price reporting mechanisms, or does it do something more radical to establish the value of live cattle? Much smarter minds than mine have made recommendations over the past five years but nothing has been acted on. I thus offer a proposal that I first floated in January 2015.
I suggest the industry considers developing a live cattle value index. The index would include the following: USDA’s five-area steer and heifer average live and dressed prices of the prior week; the average close of the nearby live cattle futures contract for the prior week; USDA’s weekly blended Choice-Select cutout for the prior week; and USDA’s weekly average by-product value for the prior week. The index would start at 100 and be adjusted weekly throughout the year. At the end of year one, an analysis would be conducted to see how it tracked against USDA-reported weekly cash prices. I welcome any feedback about my idea. — Steve Kay
