Fed cattle markets have been struggling the past few weeks. It seems they are stuck on steady, $114, while I’m sure most cattle feeders were thinking we would be in the upper teens. The futures markets have been falling like a rock and not sending many signals for price improvement.
Last week, Sens. Deb Fisher (R-NE) and Ron Wyden (D-OR) offered the Cattle Transparency Act, a bill that would instruct the USDA to establish regional mandatory minimums for negotiated cash trade of fed cattle. It would also establish a library of cattle formula contracts and amend the definition of “cattle committed” to expand the delivery window from seven days to 14 days. Plus, it would clarify the confidentiality rules for administering Livestock Mandatory Reporting (LMR), which will need to be reauthorized next October.
It doesn’t appear that folks have much patience to see how NCBA’s 75% Plan will work. We haven’t even reached the end of the first quarter of information to evaluate. Negotiated cash trade has been more robust in the Southern Plains, which is where the problem is; Northern feeders have robust cash trade. For several months Texas feeders have been trying to sell more cattle on the negotiated cash market. Last week they sold 21.3 percent of their cattle on the cash market and, after the past four or five months, the lowest they have been is around 10 percent. Kansas feeders appear to be having a tougher time creating robust cash trade.
It’s not difficult to understand why some, mostly large multi-yard feeding companies, like the formula trade. Last week the dress cash trade was $180, while formula yards were selling for $186 because of grid premiums. Better cattle should bring more. I realize that a lot of cash trade feedlots would like to know more about the big feeders’ exact deals. I would encourage feeders to create a better relationship with several packers.
I can’t image how a law that requires X amount of negotiated cash trade in each of the five major feeding regions will work. Who is going to be the gatekeeper? How much will it cost? It must cost something to get a police force in place to carry out the laws. Will there be penalties for not reaching the required threshold of negotiated cash trade? Will the cash threshold be required every week or averaged out in a quarter? There are a lot of questions to ask. And you know the old saying, “Be careful what you wish for.”
I would have to imagine that USDA will establish a mandatory minimum cash trade to follow the guidelines that Dr. Stephen Koontz at Colorado State University laid out for the industry last year. Is 15 percent cash trade good enough for price determination or is it 30 percent? If we’re going to place our marketing system in the government’s hands, let’s go all the way and ask for parity plus. Do you want to create a marketing program like the dairy industry has and always complains about?
What changed? We’ve had theses black swan events that have disrupted the cattle markets. This new sensitivity is because the big four packers rightsized their business and closed excess capacity (see Steve Dittmer’s story nearby). They have better utilization of plant and equipment, currently around 95 percent. In the early 2000s they were utilizing 80 percent of their capacity. The beef supply chain is so tight right now that any little disruption slogs the market. Cattle start backing up in feedyards and we see a price correction.
Other aspects of this bill are fine. It would be nice to know all the details in formula contracts. LMR could go further and give us the details on formula grid trades. I’m pretty sure the data is there, and the industry could take the raw data and present it in a more meaningful way. And we do need to fix this confidentiality deal in Colorado. I would like to see the Northwest receive some detailed fed market attention.
This bill will cause division in the industry. We know that NCBA wants to keep the government out of the cattle marketing system. The other cattle groups want to pass something to force packers to buy more cattle on the cash markets. I, for one, say the less the government knows about my business, the happier I am. Pray for spring rains. — PETE CROW
