Good trades: Industry talks 30 or 50 percent negotiated trade

by | Apr 17, 2020 | 0 comments

The cattle industry is talking seriously about legislation to require packers to buy a certain amount of their kill via the negotiated cash or “bid and buy” market.

Currently, according to different analysts around 20 to 25 percent of the weekly slaughter is purchased via cash trades that involve price negotiation between the cattle seller and buyer. The three major cattle organizations all agree that this amount of cash trade nationwide is not enough to provide accurate price discovery of live (finished) cattle.

Because the remainder of the cattle slaughtered each week are sold via formula contracts tied to the cash market, an active and transparent cash market is crucial to maintaining true price discovery for the entire live cattle segment.

Western Nebraska rancher and auctioneer Matt Lowery believes “formula cattle” or the fat cattle sold via agreements tied to the cash price are a problem. “Right now the only fix we have is to figure out how to get rid of formula cattle,” he said.

Industry conversations of mandated 30 percent or 50 percent cash trades are being discussed. Lowery said either of those proposals, or something in between would be an improvement over the current situation. But more changes will be needed.

“Do I think it’s a fix? No, I don’t, but it’s a step in the right direction. It’s going to take a series of many different things to establish competition in the marketplace.”

“What is going on (the significant discrepancy between live cattle prices and boxed beef prices) is manipulation. Just 10 days ago a gross packer margin on a fat steer was $734. I understand everyone has to make money, I don’t want to see anyone in the red. Do I want to be rich? No, I just want to be able to pay myself,” he said.

While packer margins have hit record highs several times in recent weeks, live cattle prices have fallen to at least $300 per head less than most feeders had planned for, and feeder calf prices will follow suit.

“If you’ve got fat cattle to sell, they might give you five minutes to decide on a bid they offer, how is that fair?”

Often it is the smaller feeders selling in the cash trade situations. As they go broke, which they are, said Lowery, the cow-calf producer suffers. “If you take the small feeders out of the equation, you take the competition out of the marketplace,” he said.

It’s important to maintain the smaller, independent feeders rather than allowing just a handful of large corporate feeders to finish all of the cattle, Lowery said, for the viability of rural America.

“The small feeders, they shop at the local lumberyard, they support community programs.

“When you look at 2014 and 2015, (with strong cattle prices) look at how strong our communities were.”

Nebraska Cattlemen’s Association government affairs director, Ashley Kohls, said her organization has had on the books since 2016 a policy encouraging 50 percent negotiated cash trade.

Recently the board of directors amended the group’s policy to call for a federal mandate requiring each of the big packers to purchase 50 percent of their weekly slaughter via cash trade.

“We thought it was a good starting point,” said the organization’s director of government affairs, Ashley Kohls. Because 50 percent isn’t a “magic” number, she said her group will likely consider alternatives, but it believes the concept is important to achieving robust price discovery, which is on “the forefront of everyone’s discussions right now.”

R-CALF USA also supports a mandated 50 percent cash trade rule, which is something they’ve been working on for years, said the group’s CEO Bill Bullard. He says the data show that over the past several years, the packers have bought about 24 percent of their purchases in the cash market, on a national average. Some buy more than that, some buy significantly less than that. Mandating they all go to 30 percent won’t make enough difference, he believes.

“The question we have to ask ourselves is, are we going to be satisfied to make minor tweaks to what we know to be the most serious problem facing our industry today, or are we going to make a determination of what is absolutely needed in our industry to insulate this most important market from price distortions and manipulations that can occur in a highly concentrated marketplace like we have?”

R-CALF USA doesn’t believe a 6 percent increase is enough. “If the industry is serious about restoring competition, we need to stand firm. For far too long we’ve been willing to compromise because ‘we can’t get support for that.’ We’d better get support or we won’t have an industry left,” said Bullard, on an online presentation.

The United States Cattlemen’s Association supports a 30/14 rule which would require that each of the major meatpackers purchase 30 percent or more of their kill on the cash market, and that cattle be delivered to the plant within 14 days of any sale agreement.

The organization’s Senior Policy Advisor Jess Peterson said that his group supports more than 30 percent cash trade, but the industry is so “broken” that it will take several steps to fix it.

“You have to start going forward and making progress,” he said.

Peterson emphasizes that 30 percent is a “floor” not a “ceiling” and because it would be difficult to hit exactly 30 percent each week, he believes that often packers would buy more than the required minimum on the cash market.

Lowery and the groups agree that more must be done.

The U.S. Cattlemen’s Association doesn’t believe this is a “silver bullet,” but hopes it is a tool to help improve the cattle market.

R-CALF USA believes that in order to restore competition, mandatory country of origin labeling of beef is needed as badly as the cash market minimum.

The Nebraska Cattlemen asked for a Department of Justice investigation into the price disparity during the coronavirus pandemic.

Lowery proposes that the industry consider federal legislation to somehow tie the price of live cattle to the price of boxed beef.

“It stops us from having a wreck. It takes the large swings out of the market and also eliminates formula cattle and the CME manipulating markets,” he said.

“There’s nobody that can deny what is going on in this industry,” said Lowery.

“When you look at the whole picture of the industry, this is about greed. If we don’t fight for our livelihoods, our kids and grandkids, eventually we are just going to be a number. We are going to be taking care of someone else’s cows. That’s not how my heart beats, when you have ownership in something, you have pride and passion in what you do. If you take the pride and passion and heart and soul out of America, that’s not the America we were supposed to be.”

Article originally published in Tri-State Livestock News, April 17, 2020


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From the Holcomb Tyson fire to COVID-19;
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