Cattle pricing during an economic crisis
By Charlie Gracey, Contributor, Canadian Cattlemen
June 22, 2020
Society has not yet discovered a better pricing mechanism than a free and open marketplace and is not likely to do so. Price signals the public demand for the product, with high prices signalling the demand for more, and the converse.
Does this mean that one should never seek to override price signals that are far higher or far lower than normal trading channel ranges?
During the present COVID-19 pandemic we have seen cattle prices drop catastrophically while cut-out values soared. In this situation, the boxed beef processors are reaping unusually high returns while the cattle feeders sustain heavy losses. The high prices will be passed on to the consumers, justified by temporary scarcity, and the low prices will be passed back to the cow-calf producers, justified by necessity.
In other places there are checks and balances. Upper and lower daily limits are a feature of the futures markets and stock market managers can actually stop trading temporarily. These interventions with free market processes are necessary to retain good order and to prevent massive opportunistic windfalls on the one hand, and catastrophic losses on the other.
Several years ago, the cattle industry did something quite remarkable and best explained by a short discussion of the evolution of cattle pricing methods.
Before the advent — and common usage of — livestock scales, cattle were traded, of necessity, on a dollars per head basis. Here the advantage lay with the buyer who was more experienced than the seller in judging weight and quality.
With livestock scales becoming more common, cattle pricing slowly but surely shifted to a live weight basis. This removed any uncertainty about weight, but the experienced buyer still held an advantage in assessing the yield and quality of the animal and its carcass.
Later selling shifted further to a carcass weight and quality grade basis. Other measures were necessary to ensure accurate weights within the packing plant, but the system represented an important step forward.
Then, with the general decline from trading in sides and quarters, the industry moved another step forward to boxed beef and through the work of Canfax, cut-out values became widely understood.
In quick review, each step forward increased the precision of determining value and, by the same measure, fairness.
Finding a fair price ...
more, including charts