9 prescriptions for fixing the cash market

The cash market for fed cattle is ailing. Here are some ideas for giving it a “shot in the arm” to bring it back to life.

 

Steve Dittmer, Commentary, BEEF Magazine

May 14, 2020

 

There are reasons the negotiated cash market has thinned and alternative marketing arrangements (AMA) have flourished.

 

That’s among the many results of research into the ailing cash market for fed cattle. Beyond the Mandatory Price Reporting (MPR) information and the USDA-RTI study, there are the attendant interviews with cattlemen and packers: all research involving Stephen Koontz, ag economics professor at Colorado State University.

 

Koontz’s interviews with feeders over cash marketing problems pinpoint less control over shipping date, clearing pens for incoming cattle and feed costs for extra days. These considerations and others have operational efficiency costs.

 

Then there are risks, like cost and performance losses from cattle not shipped at the optimal time for grading and yield, cited by both small and large feeders. The larger operations could not risk having large portions of their showlist not marketed on time. For small operations, it was not getting good bids in time.

 

Packers also had complaints about timing. AMA cattle provided more predictable flows of cattle and more communication between feeders and packers than cash deals.

 

Inefficiency means higher costs

 

But most of the AMAs, whether formula, forward contracts or branded beef, rely on a cash market price in their pricing equation, not just the supply and demand of AMA cattle.

 

Markets and market information can be considered a public good and that is one reason the government collects and disseminates market information. While the public pays for that information through taxes and user fees, the other means of marketing, like AMAs, do not pay anything.

 

Those who use the cash markets invest time and resources to establish prices. Everyone else “free rides” on the efforts of the cash traders, Koontz points out, including downstream and upstream segments.

 

Koontz said achieving the economically optimal level of a public good in competitive markets requires group action and some market intervention. Often, it is associations of individuals who reach the conclusion they must act because doing nothing is not a solution.

 

Koontz put together a series of potential options, ranging from voluntary steps individuals could take to more structured initiatives that mandate behavior and include economic incentives. The intermediate ones suggest new information provisions and changing business practices. Several options could be tried at once.

 

But, Koontz said, the steps must take into account the costs and risks inherent in cash trading and provide incentives or offsets.

 

The order of the suggestions goes from least effective and most flexible to most effective and least flexible. The following are highlights from the RTI study—the original is 15 detailed pages (add link here). - - just a note for me.

 

1.    Forum ...

 

2.    Basis trading ...

 

3.    New trading and reporting technology ...

 

4.    Institutional practices ...

 

5.    Standard business practices ...

 

6.    New marketing information ...

 

7.    Market makers ...

 

8.    Permits or certificates ...

 

9.    Legislation ... 

 

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https://www.beefmagazine.com/risk-management/9-prescriptions-fixing-cash-market