Data show that fed cattle sold live outsell cattle sold on a grid. So why sell on a grid?

Nevil Speer

February 20, 2019

2 Min Read
February 2019 | Steer Value
Nevil Speer

During the past several weeks, Industry At A Glance has focused on various dynamics around the live fed cattle market. That discussion has highlighted trends around negotiated trade, volatility, basis and regional price differences.

To that end, it’s often assumed the live cattle market serves as a bottom-end base – and all other forms of cattle trade (dressed, grid and formula) are always superior to weekly live trade. That thinking is especially entrenched among critics of the current marketing system; they cite declining cash trade as means of suppressing cattle values. That particular issue was addressed in this column several weeks ago, noting that, “…while cash trade has diminished, basis [cash minus futures] has trended more in a positive direction (not the other way around)…”

This week’s graph addresses those concerns from a separate direction, comparing revenue generated from weekly grid marketings versus live cattle values sold in spot (or cash) negotiations. To remove weekly noise, the illustration depicts the differences on a 13-week moving average. 

February 2019 | Steer Value

There are a couple of key takeaways:

  1. The live market is NOT always inferior to other marketing venues. 

Over the five years depicted (’14-’18), cattle selling live netted an average of $18 per head more versus selling on a grid. 

Related:Thinking of retained ownership? Know the regional basis

  1. Discounts outweigh premiums

There is huge variation among pens of cattle. IF the cattle are expected to perform well, they should be marketed accordingly on a grid. But if carcass merit is suspect or uncertain, it’s likely better to just sell them live – underscoring the importance of understanding discounts when marketing on the grid.

  1. Administrative and production efficiencies matter

Clearly, the deviations ebb and flow. However, given the $18 per head setback with grid marketing, some might ask why feedlots would ever market cattle on a grid in the first place. 

  • First, there’s inherent benefit from ensuring a marketing slot through the grid– that enables timely marketings and production efficiencies that may otherwise be missed in a strictly cash market. (Such currentness and timeliness also helps with risk management.) 

  • Second, all alternative marketing arrangements (grid, formula, forward contracts) intentionally avoid the weekly hassle of negotiation, thereby enabling administrative efficiency by allowing focus on other matters of importance. 

Ultimately, the direct cash difference may not be as large as it ostensibly appears; indirect savings help compensate for some or all of that difference. 

Related:Cash trade vs. fed cattle basis; what’s the deal?

Nevil Speer serves as an industry consultant and is based in Bowling Green, KY. Contact him at [email protected].

About the Author(s)

Nevil Speer

Nevil Speer serves as an industry consultant and is based in Bowling Green, KY.

Nevil Speer has extensive experience and involvement with the livestock and food industry including various service and consultation projects spanning such issues as market competition, business and economic implications of agroterrorism, animal identification, assessment of price risk and market volatility on the producer segment, and usage of antibiotics in animal agriculture.
 
Dr. Speer writes about many aspects regarding agriculture and the food industry with regular contribution to BEEF and Feedstuffs.  He’s also written several influential industry white papers dealing with issues such as changing business dynamics in the beef complex, producer decision-making, and country-of-origin labeling.
 
He serves as a member of the Board of Directors for the National Institute for Animal Agriculture.
 
Dr. Speer holds both a PhD in Animal Science and a Master’s degree in Business Administration.

Contact him at [email protected].

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