I’m not sure if the big powwow at NCBA’s summer marketing meeting has made a difference yet. It appeared that they were headed down the road of obligating cattle feeders to sell a portion of their cattle each week on the negotiated cash market. They have set a deadline for themselves of Oct. 1 to get something done before they start messing around with legislation to implement a cash marketing law.
Perhaps feeders took it on their own to start. Nationally, the week ending Aug. 10 negotiated cash sales were 26.6 percent of total trade volume. Texas reached 18.7 percent, which is quite a bit for Texas. Nebraska was 37 percent and Iowa and Minnesota were over 60 percent cash sales.
After watching the formula sales for a while, it’s clear that they are a better deal when the market is trending downward yet lag the market when they rise. But for the larger feeders that sell cattle every week, I would assume they all average out the same. But nonetheless the market has advanced quite a bit this last week; $5 higher on fed cattle.
One would have to think that 20 percent negotiated cash sales every week would provide enough cash sales to set the market. I’m anxious to see how the Fed Cattle Auction performs under new ownership. We all know that the auction method is the absolute best way to find value quickly. Real estate auctions are way more prevalent than they were just 10 years ago. Auctions discover real-time value.
The larger feeding companies do have an advantage when trading with big packers. This would be why the Southern Plains feeders use more formula sales, or alternative marketing agreements (AMA). You need to remember it was big feeders that brought the formula idea to packers. When the use of AMAs were starting, I remember Paul Engler of Cactus Feeders told me that they sell around 25,000 head a week and he didn’t want to start the week not knowing he had a portion of those cattle sold, which made perfect sense to me.
Can you imagine the capital requirements for these huge feeding companies? Cactus and Five Rivers Cattle Feeding each have capacity for around 900,000 head and they must sit on that investment for four to six months. This is why risk management is so important to them. And the odd thing to me is that I never hear the big packers complain about the market; they work the averages.
It’s ironic that Dr. Stephen Koontz, Colorado State University professor, completed the initial study on AMAs in 2005, yet the industry pretty much ignored it until the Holcomb, KS fire and COVID-19 came along. This is a comprehensive detailed report which should be required reading for professional beef producers. Nobody likes the instant drop in packing capacity and the effects on the market. It seems so easy to tear a market down and then takes so long to build it back up.
Now we’re going to investigate the packers and their ill effects on the market. USDA published their report a couple weeks ago and it was unrevealing. The report addressed everything we already knew.
Now the Department of Justice antitrust division is investigating, and I hope they can tell us something new. I imagine when they publish their findings, this market will be a distant memory. The Livestock Marketing Association (LMA) is the only outfit I’ve seen appeal to their auction market members for information and possible violations of the Sherman Antitrust Act or the Packers and Stockyards Act (PSA).
LMA said in a press release that USDA enforces the PSA, which in Section 202 prohibits packers from engaging in any unfair, unjustly discriminatory, or deceptive practice or device. The legislative history shows Congress understood the sections of the PSA were broader in scope than earlier legislation such as the Sherman Antitrust Act. However, court rulings and lack of enforcement have narrowed how the PSA is applied in practice. The PSA also prohibits any undue or unreasonable preference or advantage.
Examples of PSA violations include: taking turns buying; apportioning territory or supply; and packer buying practices, which restrict competition. Then they cite examples that are not violations of the PSA: significant packer profits without additional culpable behavior; using marketing agreements to procure livestock; refusing to buy certain types of livestock; and closing packing facilities even if it reduces competition.
It will be interesting to see what the Justice Department learns in this investigation. There have been many attempts to widen the definitions in the PSA or review the act for relevance since the law is almost 100 years old. — PETE CROW
