One of the perennial concerns in the cattle industry—as regular and predictable as increasing regulations, trade troubles, and market tampering—is the ever-shrinking share of negotiated cash fed cattle trade. Unfortunately, it looks like that trend will continue.

Just ten years ago, roughly 40 percent of the nation’s fed cattle sold via negotiation and another 40 percent sold via formula, with the rest selling through some other marketing strategy (i.e. grid, forward contract, or packer owned). Negotiated and formula sales kept pace with each other until about 2011, when marketing strategies diverged.

Today, formula pricing is the clear winner in terms of “market share” of fed cattle sales. So far for September (data through Sept. 8), over 66 percent of all fed cattle sold across the country were sold by formula. Though recent years have seen roughly a quarter of all fed cattle trade via negotiated cash, only 16.4 percent of the nation’s fed cattle have traded on the negotiated cash market.

As can be seen in the accompanying chart and table, the trend towards growing formula trade and thinning cash market has continued and intensified. But why?

Chart: Five years of fed cattle trade by type; Sept. 2014-Sept.2019

Distribution of fed cattle (steers and heifers) sales by type (forward contract, formula, negotiated cash, negotiated grid, packer owned, and all imports regardless of marketing type) for the past five years for the total U.S. As can be seen, the largest single marketing type (roughly 48-66 percent) is formula trade and there is a slight growing trend there over the past year. Negotiated cash fed trade is the next most common marketing type, ranging from about 16-31 percent of all trade. On the other hand, imports make up very small proportion of trades at under 2 percent. Data from the USDA “Weekly Direct Steer and Heifer Slaughter Cattle Summary” and complied by WLJ through our own publishing records. The dates along the X axis represents the date of the data issued; the reports appeared in the WLJ issue eight days later.

As Dr. Stephen Koontz of Colorado State University’s Department of Agricultural and Resource Economics wrote for WLJ in 2015, trading fed cattle via formula is logistically and economically convenient.

“The value of formulas is in four areas: feed; carcass; facility; and personnel management,” Koontz wrote.

“Formula operations had lower costs of gain as animals and pens were better managed to economic endpoints. Formula operations obtained higher premiums and lower discounts for carcasses. Again, better endpoint management results in better valuations. Formula operations had higher percent capacity utilizations. Fixed costs were spread over more animals. And formula operations had lower overhead. The fixed costs that they had were lower. The cumulative value of the formula was reasonably $25 per head. As long as these areas remain important incentives for cattle feeders, then formulas will be well used.”

USDA data suggests these incentives have remained and persisted.

Formula trade does not contribute to price discovery, however. It instead relies on externally determined prices. These prices can come from packing plant averages, futures market prices, wholesale beef market prices, or even USDA quoted negotiated prices. However, since formula trade has mostly grown at the expense of negotiated trade where the purest form of price discovery happens, this has concerning implications for price discovery.

The thinner the markets for price discovery, the more volatile prices are likely to become. The lower overall volume is, the larger the impact of each individual trade.

Other trade trends

Table: Average monthly distribution of fed cattle by type

** Incomplete months.

The other ways fed cattle are sold are forward contract, negotiated grid, packer owned, and imported versions of the other five marketing strategies. These represent relatively minor portions of overall fed cattle trade in the U.S.

Forward contracting, where a certain quantity and quality of cattle are sold to the packer more than two weeks before delivery in customizable agreements, have been slowly declining over the past five years.

However, the five-year focus of the data presented here does not show the trend returning to past levels of around 10 percent of total trade. At the beginning of 2014, the proportion of fed cattle traded via forward contract jumped to about 20 percent after having spent years consistently in the previous decade.

The other two types of fed cattle sales—packer owned and imports of all sorts—have consistently remained extremely minor players in the overall fed cattle market.

As can be seen in the chart and table, packer-owned cattle have been a declining portion of the market. All the imported fed cattle—99.5 percent of which came from Canada with the rest from Mexico in 2018—usually make up less than 2 percent of total fed cattle sales. In recent years, this proportion seems to be declining. — Kerry Halladay, WLJ editor

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