A varied group of individuals met in Kansas City, Missouri, last December to discuss how to improve the current Livestock Mandatory Reporting system (also known as mandatory price reporting) so that adequate and useful information is available to buyers and sellers of fat cattle.
The stakeholder meeting was hosted by USDA. LMR is updated every 5 years, with the last updates being done in 2015.
Determining the value of a product can be challenging. The seller thinks it is worth more, the buyer wants to pay less.
Both try to find out what a similar product sold for recently.
This information is not always available to sellers of fat cattle. And the limited data available may not always be relevant, which means loads of cattle, worth tens of thousands of dollars, may or may not be valued properly. A penny or two per pound can mean the difference between profit or loss for the cattle feeder, so price discovery is crucial not only for that individual but for the entire industry.
Ted Schroeder, a professor within the Kansas State University Department of Ag Economics, said that, while he believes changes are needed to the LMR rules, in order to facilitate the availability of more and better data, there is another elephant in the room causing these marketing challenges. Schroeder, along with Dr. Glynn Tonsor, Kansas State University and Dr. Lee Schulz with Iowa State University, studied the topic and presented some potential updates.
With only 10-15 percent of fat cattle being sold on the open or “cash” market, the data available to establish the true value of fat cattle across the country is slim. “Price reporting can’t fix that issue,” said Schroeder. “It can try to improve its procedure in light of those changes that are occurring.”
Cattle rancher and economist Brett Crosby of Cowley, Wyoming agrees.
“It gets to the point where you have four participants who buy 80 percent of the cattle and they have price information for 80 to 90 percent of those. Then what you have is four entities with 72 percent of the transaction information,” said Crosby.
Schroeder and Crosby both acknowledge that no amount of tinkering with the LMR rules will produce enough data to accurately establish the value of every pen of fats being marketed week in and week out across the nation.
“If you’re in the market and you’re trying to negotiate a cash deal, you don’t know what the formulas traded at, so you really only know what 10 percent of the total kill brought,” said Crosby, and the quality of the cattle on the reports is not always evident.
But, better data will help. So, they press on.
Schroeder said he and his research partners looked at a couple of major factors affecting the continued drop in available data. In addition to fewer and fewer cash trades being conducted, there are fewer and fewer buyers in the marketplace (nationwide, four major packers buy about 80 percent of the cattle, so in many regions there are only one, two or three buyers).
Under current reporting rules, negotiated cash trades with delivery dates in the next 0-30 days are all lumped together. Schroeder said this is due to the limited number of trades. However, some have talked about creating two data sets – one with delivery scheduled for 0-14 days, and another for delivery scheduled for 15-30 days. Upon reviewing the data, the researchers found that, indeed, the two different timeframes often produce different prices.
But sometime fixing one problem creates another, like in this case, where dividing an already slim set of data, could mean that sometimes, data is nearly non existent for one or both of those windows of time, particularly for the regional reports. In addition to a national report available from USDA, which Schroeder said isn’t terribly helpful to feeders because of regional pricing differences, there are currently five reporting regions: Iowa/Minnesota, Nebraska, Colorado, Kansas and the southern region of Texas, Oklahoma and New Mexico.
Crosby and Schroeder both point out that quite often some of these regions, particularly Colorado, Kansas, and the southern region, report very few trades, if any, because of confidentiality rules.
The 3-70-20 rule, in a nutshell, requires that at least three buyers (packers) are actively bidding and buying in the marketplace for at least 60 days running. “It’s a challenge in the southern region, Kansas and Colorado,” said Schroder. “There’s not enough data there.”
The researchers discussed adding states to the current regions. For example, South Dakota tends to report more negotiated trades than most other states. However, this poses a problem in that, historical data then becomes difficult to use.
“You might say, why don’t you combine states? It seems like a no-brainer?” said Schroeder. “If the prices always tend to mirror each other, then combining them won’t be a bad thing, but if they diverge from each other at times and you combine them, then you are masking that divergence, you are losing that information for market participants.”
For example, while Illinois and South Dakota tend to report more cash trades, combining one of those states with Texas doesn’t make sense because of differences in quality and other matters.
Crosby said it is possible that two regions – a north and south reporting region – would provide more helpful data.
The two regions could produce a “weighted average” report, he said. “Maybe you give a range of prices and then aggregate them together to give a weighted average for every weight of steers sold.”
Schroeder said that it is possible that instead of adding more states and expanding the regions, the industry may want to consider congregating regions so that there are only about three, which would help alleviate some of the confidentiality challenges.
The price reporting rules are likely to be in constant evolution for the foreseeable future, he said, because the industry is changing quickly.
“We used to say the cattle industry is slow, sluggish to change. That’s not the case anymore. If you look at the last 5-7 years, there has been a magnitude of change.”
Schroeder doesn’t expect the volume of negotiated trades to increase from the current 10-15 percent. He foresees the industry possibly moving toward a more integrated system where producers partner with retailers in order to attempt to capture more of the value from the beef their cattle are producing.
“Ultimately, we all want transparency and price discovery so each side has as much information as possible when negotiating transactions. But it’s also important that individual participants’ privacy and strategies are not compromised in our effort to gather information. This is a complex issue, and any changes will require careful consideration so we can avoid unintended consequences.,” said Crosby.Article originally published in Tri-State Livestock News, February 7, 2020