Will Grassley’s bill save the cash market for fed cattle?

Proposed legislation requires 50% of fed cattle be bought on the cash market.

 

Steve Dittmer, Opinion, BEEF Magazine

May 21, 2020

 

Dittmer is a longtime beef industry commentator and executive vice president of the Agribusiness Freedom Foundation

 

Sen. Charles Grassley (R-IA) recently proposed legislation to mandate most packing plants to procure at least 50% of their harvest needs from negotiated cash deals. The question now before the beef business is this: Is mandating the level of packer involvement in the cash market good or bad?

 

A key complaint in the current furor over cattle and beef markets is the “disconnect” between futures prices and cash prices. Then there was soaring boxed beef prices. If you’ll remember, that was also a point of contention following the fire at the Tyson beef plant in Holcomb, Kan.

 

There are some problems with that reasoning.

 

First, futures contracts are not a direct reflection of supply and demand in the cattle market. They are investor vehicles and they take into account many more factors beyond fed cattle supply and demand, including all kinds of market psychology. Then there’s the lure of competing commodities, real estate, T-bills and alternative investments; the degree of investor liquidity; etc.

 

Coronavirus gave us an extreme example. When it hit, the investor herd ran like spooked horses. They got out of about everything but gold, as worldwide upheaval put fear and doubt into anyone protecting their money. That was rational and understandable.

 

If investors hadn’t reacted to some extent, it would be a sign that markets were not responsive to the real world.

 

After the Tyson fire and the coronavirus disaster, the markets quickly responded to shuttered packing plants, as Colorado State economist Stephen Koontz pointed out. Plant capacity dictates the beef supply to groceries and foodservice, and therefore, cash flow to packers and back to cattlemen.

 

Some folks react to these situations with calls for abolishing the futures. It was so in the 1970s. It is so today.

 

The problem is, that would cut off cattlemen and the rest of the beef industry from a huge pool of capital that provides opportunity and protection for the industry, most of the time. Is it wise to throw the baby out with the bath water because some of the time it doesn’t work the way we want? The ability to hedge cattle much of the time is a critical enabling factor in many folks being able or willing to feed cattle at all—or their bankers to allow them to.

 

Government help? ...

 

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