Cattle transactions deserve review
Michael Nepveux, American Farm Bureau Federation (AFBF)
via Lincoln Journal Star (NE) - Jul 1, 2020
In recent months there have been many conversations about how cattle are and should be marketed in the United States. Some discussion has focused on the optimal level of cattle transactions through certain marketing channels in order to facilitate greater price discovery. In order to more fully understand those conversations and their implications, it’s helpful to take a step back to look at how cattle are currently marketed in this country as well as the implications of mandating how private companies make business decisions.
Transaction types have changed
There are a variety of market transactions through which cattle are marketed in the United States. Thankfully due to Livestock Mandatory Reporting we have the data to be able to understand how those animals change hands and how those methods have evolved through time. There are four primary transaction types reported by the U.S. Department of Agriculture through Livestock Mandatory Reporting.
Negotiated purchases, often referred to as the “spot” or “cash” market, are where the price is determined through buyer and seller interaction the day of sale. Forward-contract purchases are an agreement for the purchase of cattle executed in advance of slaughter, where the base price is established. Negotiated grid is where the base price is negotiated between buyer and seller, and is known at the time the agreement is made. The final net price is determined by applying a series of premiums and discounts based on carcass performance after slaughter. Formula purchase is the advance commitment of cattle for slaughter by any means other than negotiated, negotiated grid or forward contract. Formula pricing uses a pricing mechanism in which the price is often not known until a future date.
During the past 15 years we have seen a dramatic shift in the way cattle are marketed. In the mid-2000s 50 percent to 60 percent of cattle sold were through the negotiated market. But that method of marketing fed cattle has declined and been replaced by formula transactions. We have seen the negotiated market decrease from 50 percent to 60 percent of transactions to about 20 percent. At the same time we have seen formula transactions increase from about 30 percent to 60 percent to 70 percent of transactions. During that same period we have seen a slight decline in negotiated grid transactions and a fluctuating volume of forward-contract transactions.
Live marketing gives way to dressed
Cattle can also be marketed on a live or dressed-carcass basis. During the previous 10 years we have seen a moderate shift even further away from live marketing to dressed marketing. In 2010 about 60 percent of fed-cattle transactions were on a dressed basis while about 40 percent of transactions were on a live basis. This past year the percentage of dressed transactions had increased to 75 percent and the percentage of transactions on a live basis had declined to 25 percent.
There’s also significant variation in the types of transactions within each of those marketing channels. Live-cattle transactions have traditionally been dominated by negotiated trade – accounting for more than 60 percent of transactions – and to some extent formula transactions. Those two are followed by forward-contract transactions, while negotiated grid has maintained a miniscule share of the trade. Dressed marketing is dominated by formula transactions. Given the large share of cattle that are sold on a dressed basis, and the fact that dressed cattle are mostly sold through formula pricing, the end result is reflected in Figure 1. Formula comprises the majority of transactions for all cattle. One interesting development is the sharp increase in negotiated-grid transactions at the expense of formula contracts. From January through April 2020, the share of negotiated-grid transactions for dressed-cattle marketings averaged about 4 percent of the total. During the most recent two weeks for which we have data, that share increased to 24 percent and 23 percent of the total.
Transactions reflect regional differences ...
Producers should be free to choose ...
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