It’s time for the rubber to hit the road in this livestock marketing price discovery debate. Legislators have been proposing bills that will disrupt the pricing system we have for fed cattle. We all want fed cattle prices to be strong because it affects every segment of production down the line.
Texas A&M University recently released a 200-page study of how the cattle business has evolved from packer concentration, captive supplies and the use of alternative marketing agreements (AMAs). I would say that every ag economist from the top land-grant universities had a hand in producing this report.
The report came out just days before the House Ag Committee was to hold a hearing about the state of the cattle business. This report will confirm that the cattle business is fine, and price discovery is at work with simple supply and demand fundamentals.
The report said, “While not the central focus of the study, one can’t discuss fed cattle pricing and capacity without acknowledging concerns over packer concentration. However, with respect to fed cattle pricing, research shows that AMAs do not create market power, because they do not change underlying supply and demand fundamentals.”
They pointed out that the use of formula pricing has reduced transaction costs, and the cattle industry would lose a tremendous amount of money if feeders didn’t use AMAs, and it could potentially cost cow-calf producers and consumers $18 billion over a 10-year period.
They also say packer concentration keeps beef prices low due to the size and scale of these beef plants—they can produce beef products at a lower cost. It may not appear to be that way now, and I doubt that packers will be able to maintain current profit margins.
The group said, “This high degree of market concentration has long fostered concern that prices are manipulated through non-competitive behavior. A great deal of work over many years has sought evidence of such behavior in the fed cattle market, but such work has consistently found little support for significant negative price effects of concentration.”
The researchers say we are in an evolving market, and the use of AMAs is part of a progressive market and supports value-based marketing. They all agree that a legislative effort to change fed cattle marketing will only cost the industry.
And that is why this report was produced: to stop all the proposed legislative nonsense. We all know the less the government interferes with markets, the more freedom you will have on how to market your cattle.
Currently, negotiated cash trade accounts for 30 percent of the fed cattle sold, and that 30 percent is enough cash trade to consider current cash trade as robust, which will support the multitude of formula pricing mechanisms. I imagine there are plenty of folks who would disagree on that claim. But just think how much it will cost packers to purchase 50 percent of their cattle on the negotiated cash market. Those additional costs will cost you at the end of the day because they will impose that cost on the price of your cattle.
Think how much the cattle industry has changed over the past 20 years. Beef was in decline because we couldn’t satisfy consumers with a quality product. Then came value-based marketing incentives. Now we are producing over 80 percent Choice and Prime carcasses, and demand has been great.
The researchers said, “The cattle and pricing market signals have evolved over 40 years. Premiums that were not present prior to AMAs are now common. One of the challenges is maintaining the reward for quality if the method of pricing changes.”
The processors and the feeding community have been changing before our own eyes. The AMA arrangements have created a finely tuned machine for inventory and processing management. We will likely see more changes down the production line going forward.
The cattle marketing system is changing, and I expect to see more producers align themselves with specific markets. Cattle change hands at least three or four times on their way to the processing plants. Every stop along that trail wants to earn a profit. Most other ag commodities change hands only once trying to reach the end consumer. This means there is a lot of congestion in the system. Remember, everything starts with the consumer dollar—and pray for rain. — PETE CROW
