As cattle producers take a hit from shattered markets as a result of COVID-19, industry groups are beginning to brainstorm ideas to support producers.
One such idea is to require beef packing companies to buy at least 30 percent of each plant’s fed cattle needs in the negotiated cash market. Cattle would then be delivered to the plant within two weeks.
A sign-on letter to be signed by producers and sent to Congress courtesy of United States Cattlemen’s Association (USCA) says the four major meatpacking companies control slaughter and processing capacity in the U.S.
As a result, the letter says the companies have the “unique ability to unduly influence the price of live cattle through the employment of tactics like bottlenecking processing speeds, importing chilled foreign meat to decrease demand for domestic supply, collaborating on pricing mechanisms, utilizing private forward-formula contracts, and piling up meat in cold storage to delay the need to purchase live cattle.”
USCA also states fewer cattle are sold on a negotiated cash basis, which reduces true price discovery in the cattle markets. The group says negotiated cash cattle make up less than 20 percent of the market, yet sets the price for the other 80 percent of cattle sold through formula contracts and the futures market.
The Livestock Mandatory Reporting Program will be reauthorized this fall, and the group recommends several changes be made to the program.
The proposal, also known as the 30-14 proposal, would require 30 percent of each plant’s weekly volume of beef slaughter be made on the open or spot market. The minimum would be mandated for each plant required to submit daily slaughter numbers to USDA, and would not include dairy-bred, dairy-bred cross, beef animals older than 30 months, or foreign-born animals.
Cattle purchased on the open or spot market would be delivered to the packer by 14 days after the sale date. No packer would be able to discriminate against a seller for selling cattle via negotiated cash sale purchases rather than other transactions.
“With these changes in place, the Mandatory Livestock Reporting system could then be used to provide accurate and transparent reports of daily prices and number of cattle purchased via cash market, providing greater market opportunity and price discovery for independent cattle producers,” the letter concludes.
As of May 6, USCA reported nearly 4,000 individual producers have signed the letter in support of the proposal.
However, the proposal has been met with criticism. Dr. Stephen Koontz of Colorado State University submitted a letter to the National Cattlemen’s Beef Association (NCBA), saying the marketing mandates could negatively impact the cattle industry.
“NCBA has been working closely with Dr. Stephen R. Koontz to develop solutions that address our concerns with the decline in negotiated cash markets and lack of price discovery,” NCBA President-Elect Jerry Bohn said in a statement. “Recently there have been calls for marketing mandates with Dr. Koontz’s research being used to support those proposals.”
In his letter, Koontz said his work does not recommend, and he does not support, a cash trade mandate. He further states that the current market situation is due entirely to supply disruptions at meatpacking plants, and disruptions in domestic trade flows.
“Additionally, we entered 2020 knowing protein supplies would be abundant most of the year,” the letter read. “None of these issues are related to price discovery.”
Koontz analyzed the proposal would cost the cattle and beef industry millions, potentially billions, of dollars per year.
In research conducted with the USDA in the early 2000s, it was revealed that the use of alternatives to the cash market are cost saving and revenue enhancing, with the main beneficiaries being the cow-calf sector and the U.S. consumer. Koontz said he has conducted additional recent research that confirmed this to still be true.
“There is also strong evidence that the value?based marketing tools that were developed through
alternatives to the cash market saved the beef industry,” he said in the letter.
Koontz said forward contracts benefit the user $15 to $25 per animal and the use of formula contracts benefit the user $25 to $40 per animal.
“Mandating the use of the negotiated cash market will have negative economic consequences commensurate with these amounts and to the extent mandated,” he said. While he notes there are economic reasons for why members of the industry would want to move away for negotiated cash market use, he states the industry may have gone too far.
“Individuals, following what benefits their businesses and business models, have had a detrimental impact on the quality of price discovery in what remains of the cash market for fed cattle,” he wrote. Koontz said there are not enough fed cattle traded in some of the five reporting regions and that the industry needs cash fed cattle market price information.
“Price discovery is a public good and there is just insufficient price information being produced.”
He recommends alternatives to mandates, and says they would all be more flexible, less costly, and be effective.
Koontz commends state associations for making the issue a priority, but says follow-up, follow-through and accountability are also needed.
He emphasizes more detailed research is needed with information that is not only USDA, and the industry needs to look at proposals it currently has. Research by Kansas State University and Iowa State University shows that expanding reporting regions would reduce the incidence of nonreporting due to confidentiality. He stresses requiring more cash trade would not change infrequently reported weekly fed cattle prices and much of the price reporting problems are due to confidentiality requirements that were not part of the original act.
Koontz concludes that his research says simply, “If you want cash fed cattle prices then you need to trade cash fed cattle.” — Anna Miller, WLJ editor
