Cattle on Feed report not as Grinch-like as it appeared

Beef cattle wait in a feedlot in Medicine Park, Oklahoma on August 13, 2009.

National Cattlemen’s Beef Association (NCBA) has released what they are calling the 75% Plan in order to achieve price discovery in the fed cattle market through a voluntary framework.

“It is no secret that in recent years adequate price information has been in decline in the fed cattle marketplace,” wrote NCBA President Marty Smith in an open letter to the industry. “This is largely due to the decrease in negotiated trade across the cattle feeding regions.”

Smith noted that, while alternative marketing agreements (AMAs) such as formulas, grids, and forward contracts are very beneficial to producers, studies have shown sufficient levels of negotiated trade must occur to achieve robust price discovery.

After two major “black swan” events—the Holcomb, KS, plant fire and the COVID-19 pandemic—NCBA created a live cattle marketing working group to evaluate the effects of the events on the cattle markets. The group reported its findings at the 2020 NCBA Summer Business Meeting and delegates in attendance ultimately agreed to adopt a Fed Cattle Price Discovery Policy.

A subgroup then created a voluntary framework with triggers based on regional levels of negotiated trade and packer participation to “increase frequent, transparent, and measured negotiated trade to regionally sufficient levels to achieve robust price discovery.” If the voluntary framework does not result in robust price discovery, then NCBA will pursue a legislative or regulatory solution determined by the membership.

Voluntary framework

The report created by the subgroup is called A Voluntary Framework to Achieve Price Discovery in the Fed Cattle Market and lays out a plan to increase negotiated trade and incentivize major packers to participate.

The subgroup will review weekly negotiated trade information for each of the feeding regions on a quarterly basis, and will eventually include analyses of packer participation once the information is published under Livestock Mandatory Reporting. To account for instances of nonreporting, NCBA will combine Colorado with Nebraska as a feeding region, but keep the other three feeding regions as is.

To avoid tripping triggers in any given quarter, each region must:

• Achieve at least 75 percent of weekly negotiated trade volume that is necessary for robust price discovery, as determined by current academic standards;

• Achieve the negotiated trade threshold at least 75 percent of the reporting weeks in a quarter;

• Achieve at least 75 percent of the weekly packer participation requirements assigned to each specific region, which will be determined in the near future; and

• Achieve the packer participation threshold of at least 75 percent of the reporting weeks in a quarter.

Although packer participation obligations have yet to be determined, the following negotiated trade obligations must be made for each feeding region as determined by Dr. Stephen R. Koontz of Colorado State University:

• Texas, Oklahoma, New Mexico—A total of 13,000 head/week purchased for robust price discovery; 75% Plan obligation is 9,750 head/week;

• Kansas—A total of 21,000 head/week purchased for robust price discovery; 75% Plan obligation is 15,750 head/week;

• Nebraska, Colorado—A total of 36,000 head/week purchased for robust price discovery; 75% Plan obligation is 27,000 head/week; and

Iowa, Minnesota—A total of 16,000 head/week purchased for robust price discovery; 75% Plan obligation is 12,000 head/week.

If triggers are tripped in any two of the four rolling quarters, NCBA will pursue a legislative or regulatory solution. Black swan events will be taken into consideration on a case-by-case basis and may allow flexibility.

“While certainly not a silver-bullet solution, I truly believe that this approach provides the industry a goal to strive towards and, perhaps more importantly, a path forward if progress is not demonstrated toward that goal,” Smith concluded.

The framework will be implemented on Jan. 1, 2021 and the first quarterly analysis will take place on March 31, 2021. If packer participation obligations have yet to be determined, only negotiated trade volume results will be used in the first quarter analysis. NCBA also supports a three-year review/sunset provision on any solutions implemented to allow for a thorough cost-benefit analysis to be conducted. — Anna Miller, WLJ editor

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