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Negotiated prices for fed cattle not dead yet

The remarkable and gut-wrenching dynamics in the fed cattle market are forcing more negotiated sales.

The role of alternative marketing arrangements (AMAs) in the fed cattle market has long been a part of the marketing mix. It’s been a part of the concern and conversation about the viability of the cash market for just as long. BEEF has explored this recently, thanks to a remarkable amount of information from Stephen Koontz, ag economics professor at Colorado State University.

The economics of AMAs are clear, according to Koontz’ research, and that explains why the majority of fed cattle are marketed that way. AMAs can lead to labor efficiency of 1,500 head per person instead of the industry average of 1,000 head. Some feedlots report a 20-percentage point increase in capacity utilization with AMAs, spreading overhead costs over more head.

Cost savings ranged from 17% to 22%, figuring 30 cents-per-day yardage (not including feed) and 150 days on feed. Total feedlot cost of $45 per head meant cost savings of $7.65 to $9.90 per head. Much of that is labor cost savings, reported in the $1.25 to $10-per-head range. Quality premium loss estimates are bigger, ranging from $15 to $17 per head, the research found.

Read: 9 prescriptions for fixing the cash market

In short, alternative marketing agreements (AMAs) have replaced the cash market for fed cattle because they cut costs for feeders and packers, increase efficiencies and improve the overall quality of beef. This does come at a cost to the depth of cash market price discovery, however.

And that’s the rub. AMAs use the cash market as one of the benchmarks for determine price.

That is now changing, in part at least. According to the Daily Livestock Report (DLR), packers have significantly reduced the number of cattle they have contracted for delivery in the next few months. A number of factors have likely contributed to this:

  • Demand is highly uncertain and forward beef sales are sharply lower than a year ago
  • Front end cattle supplies are heavy
  • Slaughter capacity has increased but COVID remains a major wild card that could further disrupt slaughter and especially line speeds

Ultimately, if the packer does not see much supply risk and faces uncertain demand, the result is a decline in forward contracted cattle. Forward contracts are just one possible AMA and not the biggest, however. “In any given week, the supply of forward contracted cattle delivered to packing plants moves around, but in the last 12 months it has averaged about 9.6% of all deliveries,” DLR reports.

Read: Will restricting AMA's really save the cash market?

But it can serve as a barometer for what’s currently happening in the fed cattle market. “The latest data from USDA show that cattle forward contracted for delivery in July are currently 43% lower than a year ago, August was down 53%, September was down 46% and October was down 38%,” according to DLR economists.

“However, the data also show that packers may perceive a bit more upside risk in 2021 and have started getting some cattle on the books for delivery next winter and early spring. Of the 50,455 head of cattle purchased for forward delivery (the week ending May 30), about 77% of those cattle were purchased for delivery in the first four months of 2021.”

What, then, is taking its place? More fed cattle sold on a negotiated grid, DLR economists say.

The increase in the number of negotiated grid cattle may present a benefit for those feedlots that do not want to be penalized by the current market conditions, especially if they are delivering good quality cattle to packers and would like to see the benefit of that,” according to the DLR economists.

“When we combine the number of negotiated grids with other negotiated cattle, the total supply for the week ending May 31 represented almost 40% of all cattle delivered to plants, a dramatic shift from the 20% share we saw in mid-April.”

Read: Market investigations underway; cash market proposals explained

In the last three weeks, the share of grid cattle was 18.7%. Prior to this, the share of this marketing arrangement was just 3.4% for the year, DLR says. So that means that the number of live cattle sold on the cash market remains about the same on average.

Will that change? Only time will tell, of course, but that’s certainly a possibility. And something that needs to happen.

This shift in the increase of negotiated grid sales is only temporary, a reaction to current market conditions. But the conversation must continue.

AMAs are here to stay. The economic advantage they provide to both feeders and packers is clear and economics will always win out. But a viable cash market for fed cattle is imperative, at least until a fundamental change is made in how fed cattle are priced.

Koontz has given the beef business plenty to think about and chew on. Now it’s time to act.

 

 

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