Last week the folks at JBS Pork division were fined $24.5 million to settle a price-fixing lawsuit. In other words, they colluded with other companies to raise wholesale pork prices. Then, several weeks ago, the same thing happened in their poultry business, Pilgrim’s Pride. I’m not sure how one would fix prices on a product. You put a price on a product and folks either buy it or not. If they don’t buy it, you lower the price. But then again, a lot of meat is sold on some kind of formula.
We all know that the Justice Department Antitrust Division is investigating the beef industry, for the same thing. I would have to assume the companies that sell chicken, pork, and beef—like Tyson and JBS—would be doing something similar. But that is pure speculation.
What we’re worried about is how much the packers pay for fed cattle. Is there some kind of price suppression going on with fed cattle purchasing? We know that they are making excellent money selling beef but we’re not liking how they buy fed cattle.
Which brings me to the 75% Plan, the negotiated cash plan kicked out by NCBA. The goal is to have robust cash trade to set the market because some formula trade is made by the five-state average fed cash price. The 75% Plan is indeed complicated, and packers don’t seem interested in veering away from their formula purchasing system. So far this week, the formula was paying $178 on their dressed cattle while the negotiated cash trade was $172. The bad part of the deal is if you want to sell on the formula you need to have some reliable volume to sell.
I am told that the 75% Plan has stalled out for confidentiality reasons and the packers won’t share their weekly volume information. Seventy-five percent of the weekly volume must reach regional robust trading levels in each quarter. Robust trade is the volume of cash trade that Colorado State University Professor Stephen Koontz says it is. In general, roughly 25 percent of regional trade volume must be negotiated cash sales. Several months ago Texas and Oklahoma would have had about 5 percent cash trade.
In 2017, Koontz, a professor in the department of Agricultural and Resource Economics, wrote in his price discovery research project that “The more cash volume there is, then the more that Texas-OK-NM contributes to price discovery and this is increasing at a slightly decreasing rate. Of course, the cash volume is trending downward in Texas and the result communicates that Texas-OK-NM no longer plays a significant role in price discovery.”
Ironically, Texas and Oklahoma are making a concerted effort to sell more cattle on the negotiated cash market. In other words, they are taking the bull by the horns and fixing the problem themselves. It will be interesting to see just how much discipline they have. Texas Cattle Feeders is a strong and well-run trade association.
The weekly direct steer and heifer cattle summary on Sept. 27 showed Texas selling 21.9 percent of their cattle on the cash market. Kansas was selling 23 percent of their cattle on the cash market. These guys must be testing the influence of cash trade on the formula trade. Were they able to set the market with more cash trade? By the middle of November, Texas cash trade was down to 13 percent while Kansas was still hovering around 22 percent cash trade.
Last week the cash call for the week was $113. There was less cash trade in Texas and the market was down, when it was expected to go higher. Did the market fall because Texas cash trade was lower? The average percent of cash trade volume in the five major feeding areas was 31.7 percent last week.
It’s looking like having 100 percent confidence in our price discovery market system is going to be a challenge and elusive. Koontz also said that “the only evidence of improved contribution to price discovery is with the live cattle futures market. That market is doing relatively more price discovery work. It has always been important, its magnitude of contribution to price discovery is not increasing, but it is relatively more important as cash volume thins.” Ironically, most cattlemen feel the futures market is our greatest nemesis.
I think we all need to remember that the cattle-feeding industry pushed the formula concept on packers, not the other way around. At this point, NCBA’s 75% Plan looks dead in the water, which means that they may have to seek a legislative solution. I don’t think that is a good idea. — PETE CROW
