It is no secret that adequate price information has been on the decline in the fed cattle marketplace in recent years. This has largely created different viewpoints across the country’s cattle-producing regions regarding how to increase market transparency, especially following the “black swan” events that included an August 2019 fire at the Tyson Foods beef processing plant in Holcomb, Kan., and fallout from the COVID-19 pandemic.
At its summer meeting, the National Cattlemen’s Beef Assn. (NCBA) put together a working group tasked with ways to voluntarily improve price discovery in the cattle market. They rolled out their plan to increase negotiated trade in what they call the “75% Plan,” which is designed to provide negotiated trade and packer participating benchmarks for the industry to strive toward.
Tanner Beymer, NCBA director of government affairs and market regulatory policy, recognized that putting together a voluntary framework to solve a complex issue is a tall order, especially in establishing ways to incentivize both the buy and sell sides of the ledger.
In essence, the subgroup will evaluate the weekly negotiated trade information for each of the cattle feeding reporting regions of the U.S. Department of Agriculture's Agricultural Marketing Service on a quarterly basis in arrears. Eventually, the subgroup will include in its evaluation an analysis of packer participation data, but this information is not yet published under Livestock Mandatory Reporting, NCBA said in a note to its cattle industry 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, and
- Achieve this packer participation threshold no less than 75% of the reporting weeks in a quarter.
In the event that triggers are tripped in any two out of four rolling quarters, the subgroup will recommend that NCBA pursue a legislative or regulatory solution to compel robust price discovery.
NCBA president-elect Jerry Bohn, a Kansas producer who served as chairman of the working group, said the voluntary plan will go into effect Jan. 1, 2021. In early April 2021, the first evaluation of the triggers for the first quarter will be evaluated.
Beymer explained that the final plan is not intended to be an ultimate fix but does put the industry, rather than the government, in the driver’s seat “until such a time is determined that we can’t achieve what we need on a voluntary basis.”
Drive for change
Earlier this year, Sen. Chuck Grassley (R., Iowa), with the backing of the Iowa Cattlemen’s Assn. (ICA), introduced a bill that would require a minimum of 50% of a packer’s weekly volume of beef slaughter to come as a result of purchases made on the open market, or spot market. In most weeks, more than 50% of Iowa’s fed cattle are traded through cash negotiation, compared to about 5% in Texas.
The decline in adequate pricing information is largely due to the decrease in negotiated trade across the cattle feeding regions. While alternative marketing arrangements (AMAs), such as formulas, grids and forward contracts, have been very beneficial to cattle producers, studies have shown that sufficient levels of negotiated trade must occur in each cattle feeding region to achieve robust price discovery.
Brad Kooima, a beef producer from Iowa who served on the NCBA subgroup, said he’s hopeful that the steps coming with NCBA’s voluntary plan reflect a movement toward a trading environment many in Iowa would support. While not a “Holy Grail,” this does call for ongoing evaluation of what is working. He said the timeline provides some time to adjust business practices to voluntarily do more and achieve the goals of improving market transparency.
Kevin Buse, who represented Texas cattle feeders on the subgroup, said no matter who you talk to in the cattle market, it is clear that “some degree of change is needed to better facilitate our market.” He said the pendulum has swung pretty far, and this hopefully facilitates a more open, fluid live cattle contract to assist producers in laying off risk as they see fit.
“We need as much transparency on both sides, because that’s going to create an atmosphere where everyone can trust moving and operating like they were,” which didn’t happen following the Tyson fire or COVID-19, as the market seized up, and cattle weren’t trading as they were, Buse said.
In the letter to members, NCBA president Marty Smith concluded, “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.”