Report tackles fed cattle cash volume and packer participation

Cattle at the feedbunk
NCBA unveils voluntary plan to enhance cash fed cattle price discovery.

“Cattle producers across all segments of the industry expect adequate price discovery in the fed cattle markets. While the framework outlined in this report represents a voluntary path to achieving robust price discovery, it is not intended to be the sole remedy to that end. Similarly, it is not intended to be static, and will need to be adjusted from time to time to ensure currency and efficacy.”

Those are the concluding remarks of A Voluntary Framework to Achieve Robust Price Discovery in the Fed Cattle Market, from the National Cattlemen’s Beef Association (NCBA). The report was prepared by NCBA’s Regional Triggers subgroup.

It stems from what many would call a compromise resolution made at the organization’s summer business meeting. Some members supported government-mandated minimum weekly levels for negotiated cash fed cattle trade. Others wanted to formalize a voluntary approach that could avoid government intervention.

READ: Politics and beef production: Can legislation cure what ails the cttle market?

Depending on your leanings, the result represents a voluntary mandate, defining minimum weekly levels of cash trade, relative to levels previously identified in research, as those necessary for effective price discovery. Think of that as silo one.

The plan also focuses on minimum weekly levels of cash participation by the four largest beef packers. Think of that as silo two.

“This is a list of benchmarks for the industry, collectively, to strive towards,” explained Tanner Beymer, NCBA director of government affairs and market regulatory policy, during the Oct. 16 podcast episode of Beltway Beef. 

“It’s not a silver bullet solution. It’s not intended to be the ultimate fix to the marketplace, but ultimately what we wanted is to have the industry in the driver’s seat until such a time that it was determined that we can’t achieve what we need to on a voluntary basis,” Beymer said.

The 75% plan

“The framework explains in detail what we are calling the 75% Plan, which is designed to provide negotiated trade and packer participation benchmarks for the industry to strive toward,” explains NCBA president Marty Smith, in a letter to that organization’s members.

To avoid tripping triggers, in any given quarter, each region will have to:

  • Achieve no less than 75% of the weekly negotiated trade volume that current academic literature indicates is necessary for robust price discovery in that specific region.
  • Achieve this negotiated trade threshold no less than 75% of the reporting weeks in a quarter.
  • Achieve no less than 75% of the weekly packer participation requirements, to be determined in short order, and assigned to each specific region (more later).
  • Achieve this packer participation threshold no less than 75% of the reporting weeks in a quarter.

Jerry Bohn, a Kansas cattle producer, served as chairman of the Regional Triggers Subgroup, tasked by the NCBA Live Cattle Marketing Work Group to develop a voluntary framework, including triggers, to increase frequent and transparent regional trade to a regionally sufficient level.

Rewlated: A cattle buyer's thoughts on cash and contract prices

“We took the robust trade numbers that were identified by Stephen Koontz’s research (2015) and applied them to each major cattle feeding area of the country, and we said that to meet the minimum amount of negotiated trade on a weekly basis, over a nine-week period, we had to meet 75% of that volume,” according to Bohn.

Stephen Koontz, agricultural economist at Colorado State University, continues to conduct industry-leading research into cash price discovery.

“For instance, in Kansas, the robust number that Dr. Koontz identified was 21,000 head of negotiated trade on a weekly basis, so 75% of that is 15,750 head per week,” Bohn said. “We did that for every region of the country. From there, we put together this trigger plan of 75% of the required volume each week, 75% of the time.”

The framework defines four cattle feeding regions: 1) Texas, Oklahoma and New Mexico; 2) Kansas; 3) Nebraska and Colorado; 4) Iowa and Minnesota. Weekly robust cash trade levels for the regions range from 5,000 head (Colorado) to 31,000 head (Nebraska).

Related: The PRICE Act: What you need to know

The subgroup also believes robust regional price discovery demands sufficient levels of weekly packer participation in negotiated trade.

“Each of the four major packers shall be responsible to participate in negotiated trade, at appropriate and adequate levels, within each of the regions from which they predominantly procure fed cattle,” according to the framework report. “At this time, there is insufficient data published under LMR (Livestock Mandatory Reporting) to measure the participation of the major packers in negotiated trade within each region.

“NCBA is currently involved in conversations with U.S. Department of Agriculture’s Agricultural Marketing Service (USDA-AMS) to determine what packer participation information can be shared under the current LMR statutes and USDA’s rules of confidentiality. The subgroup has drafted a potential framework for the packer participation silo, but will await additional information from USDA-AMS before finalizing.”

When and how triggers trip

The framework defines eight minor triggers, each having to do with whether or not threshold negotiated trade volume and threshold packer participation were achieved in various regions.

The subgroup will evaluate, on a quarterly basis in arrears, the weekly negotiated trade volume and packer participation information for each reporting region, using LMR data from USDA-AMS.

To avoid tripping a minor trigger, each region must:

  • Weekly trade 75% or more of its “robust” price discovery threshold via negotiated means, no less than 75% of the reporting weeks, and
  • Weekly fulfill its packer participation obligations (to be determined as outlined above) no less than 75% of the reporting weeks.

In any given quarter, the tripping of three or more minor triggers equals a major trigger.

READ: USDA investigation shows cattle markets work

“In the event that a major trigger is tripped during any two out of four rolling quarters, the subgroup shall recommend NCBA pursue legislative or regulatory measures to compel adequate negotiated trade for robust price discovery,” according to the report.

“While certainly not a silver-bullet solution, I truly believe that this approach provides the industry a goal to strive towards and, perhaps more importantly, a path forward if progress is not demonstrated toward that goal,” wrote Smith.

The subgroup intends to implement the framework Jan. 1, 2021.

 

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