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Part one in a three part series in which Bill Mies, professor emeritus at Texas A&M, explains what needs to modernize the beef industry to meet current demands.
June 3, 2011
If you bought a new pickup in 1965, you got the best technology Detroit had to offer – an AM radio and 2x2 air conditioning; that is, two windows and two hand cranks to roll ’em down with. Buy a new pickup today and it’s like climbing into the cockpit of an airplane.
Times have changed – at least as far as pickups are concerned. But what about some of the tools cattlemen use to determine markets? “Are those tools, those things we do, still valid? Are they still tools we need in the modern times we live in today?” asks Bill Mies.
In terms of today’s markets, cattlemen are still driving 1965 pickups, figuratively speaking, while trying to keep pace in a crew cab, XM radio and GPS-guided world, Mies says. BEEF Cow-Calf Weekly begins a three-part series this week featuring Bill Mies, former feedyard manager, professor emeritus of feedyard management at Texas A&M University, and one of the industry’s preeminent thinkers.
In this series, Mies examines three aspects of the modern beef business that, in his opinion, need updating – live-cattle futures, the Cattle On Feed Report, and the beef checkoff. This week, he addresses live-cattle futures. You can also watch a video interview with Mies here.
Live Cattle Futures
If the beef business wants to think outside the box when it comes to modernizing itself, the first place to look is inside one.
In 1965, the Chicago Mercantile Exchange (CME) developed the live-cattle contract for a cattle-feeding industry that was considerably different than it is today. “We only had five breeds in the country at that time – Hereford, Angus and Shorthorn, some Brahman cattle in the South, and some Charolais crosses up North,” Mies says. Those cattle were all harvested at 1,050 lbs. if they were steers, or 1,000 lbs. if heifers. “And we killed them all that way,” he says.
“In 1965, we were just building the interstate highway system and the trucks were different. So they set 40,000 lbs. as a truckload of cattle. And they set up a way to deliver those cattle so USDA graders would grade them live. Boxed beef was just an idea.”
What’s more, the CME only developed six contracts. “In 1965, there weren’t enough cattle on feed and the Mercantile didn’t think they’d have enough volume to make any more than that viable,” Mies says. So in the odd months, you can be as far as 60 days out.
Nowadays, there can be as many as 90 different breeds in a feedyard. Live and slaughter weights are considerably larger and considerably more variable. Cameras and computers can grade cattle. Virtually all beef from fed cattle goes out in a box.
In short, Mies says, a lot of the things the industry uses to establish prices on the live-cattle futures contract aren’t accurate enough for the business we live in today.
Where that becomes a problem is in basis volatility and bringing the futures and the cash into convergence. Back in 1965, packers bought fed cattle every day. Today, the cash market is established in a one- or two-hour window one day a week. “The rest of the time, the market is trying to figure out what we’re going to pay during that window. It runs the market up and down needlessly, trying to guess where the cash is going to be.”
Mies says cattlemen have only to look over the fence at their hog-producing neighbors for a solution. Hog producers figured out that there weren’t many consumers buying live hogs. So, 12 years ago, they based their futures contract on the pork cutout. “And they’ve gotten along fine.”
If cattlemen eliminated the live-cattle contract and replaced it with a boxed-beef contract, the industry would then have price discovery using mandatory price reporting, which generates data every day, twice a day.
Further, the price information is based on carcass cutout values, which is what the industry really sells. “Do we produce live cattle and sell that to the consumer? No, we sell boxed beef. That’s what we ought to be using as a risk-management tool.”
Using boxed-beef contracts would produce sufficient volume to handle 12 contracts, he says. “So we’d have a contract for each month and eliminate the convergence and cut down on basis volatility.” And converting the boxed-beef contract to a live-cattle value is a simple multiplication using dressing percent.
What’s more, a boxed-beef contract would allow retailers – those people who sell cattlemen’s product to consumers – to use it as a risk-management tool, further adding to the volume. “So there are some opportunities out there if we think outside the box and think about moving to a boxed-beef contract,” Mies says. “It’s what we produce. It’s time to recognize that fact and update our futures contract to match our business.”
Next week: The Cattle On Feed Report
Senior Editor, BEEF Magazine
Burt Rutherford is director of content and senior editor of BEEF. He has nearly 40 years’ experience communicating about the beef industry. A Colorado native and graduate of Colorado State University with a degree in agricultural journalism, he now works from his home base in Colorado. He worked as communications director for the North American Limousin Foundation and editor of the Western Livestock Journal before spending 21 years as communications director for the Texas Cattle Feeders Association. He works to keep BEEF readers informed of trends and production practices to bolster the bottom line.
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