Last fall, National Cattlemen’s Beef Association (NCBA) introduced a voluntary framework to help increase price transparency in the fed cattle market. The plan included certain triggers that would help determine if sufficient negotiated trade and packer participation took place in each quarter. If two major triggers are tripped in consecutive quarters, NCBA said they would pursue legislative or regulatory action.
Jerry Bohn, NCBA president, recently provided an update on the status of the framework in a letter to association members. On July 6, members of the Regional Triggers Subgroup of the Live Cattle Marketing Working Group met in Denver and heard from economists, discussed current market issues and analyzed second quarter results.
“First and foremost, the subgroup remains committed to reaching a workable solution that improves price discovery in live cattle markets,” Bohn wrote. “Robust fed cattle price discovery is critical to all producers—regardless of the industry segment in which they operate.”
Using Livestock Mandatory Reporting data, the subgroup determined there were no minor triggers tripped in the negotiated trade volume silo in the second quarter. As the packer participation silo was incomplete through the second quarter, no major trigger tripped either. However, NCBA was recently able to finalize agreements with four major packers and starting in the third quarter, the association will now be able to analyze packer participation.
The completion of the packer participation silo brings the total number of minor triggers to eight—one trigger for each cattle-feeding region analyzing cash trade volumes and one trigger for each region analyzing packer participation.
“Resolving this critical piece of our voluntary effort will help ensure that both buyers and sellers of live cattle bear mutual responsibility for achieving robust price discovery,” Bohn wrote.
Under NCBA’s framework, in order to avoid tripping triggers in any given quarter, each region must:
• Achieve 75 percent of weekly negotiated trade volume that is necessary for price discovery (as determined by academics);
• Achieve the threshold of at least 75 percent of the reporting weeks in a quarter;
• Achieve 75 percent of the weekly packer participation requirements; and
• Achieve the packer participation threshold at least 75 percent of the reporting weeks in a quarter.
Bohn said there was a “striking” level of buy-in to the voluntary framework from cattle producers through the second quarter. He noted producers have worked overtime to offer more cattle on a negotiated basis, and there was more cash trade in the second quarter compared to the first quarter.
“I am encouraged by the continued improvements we are seeing in negotiated trade from cattlemen and women nationwide and am confident we as an industry can continue to deliver impressive results,” he said.
However, whereas he praised producers, Bohn said NCBA was frustrated with some of the major packers and “the lack of urgency” they have demonstrated in procuring fed cattle. The subgroup hopes the completion of the packer participation silo will help encourage all major packers to be part of the solution to price discovery.
“Every transaction requires both a willing seller and a willing buyer,” he wrote. “Some packers have shown a desire to work alongside us to increase their procurements of negotiated cattle, and we appreciate that they have recognized the importance of price discovery to the entire industry.”
Bohn said the group discussed some of the lessons they have learned over the course of implementing the voluntary framework, which included five major takeaways. They are:
• Cattle marketing varies substantially from one region to another. Whereas some areas have quality grades as the primary value driver, others emphasize dressing percentage.
• Price discovery and price determination are different things. While negotiated trade volumes exceeded robust price discovery levels in all regions in four trading weeks, cattle prices did not make significant gains. Bohn said high cattle supplies and lack of adequate processing capacity have helped create a dynamic where packers still have all the leverage.
• Use of non-value-added formulas neither contribute to price discovery nor increase cash trade. These formulas include weighted averages, “cash plus” transactions and “top of the market trades.”
• More research is needed. Sufficient data exists to quantify the dollar value of alternative marketing agreements, but more academic literature is needed to quantify their impact on price, Bohn said. More research is required to understand the role of competition or packer participation in price discovery and the industry-wide cost of reduced negotiated volumes.
• NCBA should examine LMR to see if changes are needed to strengthen reported price information. Bohn gave the example of the formula bucket being a catch-all for transactions that do not meet the definitions of negotiated cash trade, negotiated grids or contracts. Separately reporting the most common transaction types may provide greater transparency.
“As has been said many times, there is no simple, silver-bullet solution to the challenges that are facing cattle producers in the market today,” Bohn said. “Reaching a solution that is both industry-driven and supported by sound research and science, that supports profitability for producers in every segment of the supply chain, will require transparency and nuance.” — Anna Miller, WLJ managing editor
