Cattle group proposes more transparency in market prices
As an antidote for the dwindling cash market, the largest U.S. cattle group circulated a plan on Tuesday for meatpackers to voluntarily buy cattle on the spot market to assure fair and open prices, with the threat of mandatory disclosure if the systems fails. The so-called 75 percent plan by the National Cattlemen’s Beef Association stood as an alternative to bills in Congress to require packers to buy as many as half of their slaughter cattle for cash.
“It is no secret that in recent years, adequate price information has been in the decline in the fed cattle marketplace,” said NCBA president Marty Smith in a letter to members. “The availability of current and accurate market information has a substantial impact on our ability to make informed marketing decisions as cattle producers.”
During the coronavirus pandemic, wholesale beef prices jumped to record levels, but at the same time, cattle prices plummeted, putting many ranchers on the brink of collapse. The huge disparity led to charges in Congress that meatpackers were engaged in price gauging; the Justice Department also launched an investigation. But the charges of a lack of competition in the industry go back years.
Roughly three of every four head of slaughter cattle are sold under contracts or through price formulas that reward producers who meet criteria set by packers. Four companies account for 80% of U.S. cattle slaughter. Critics such as Iowa Sen. Chuck Grassley say too few cattle are sold on the open market for independent producers to be sure they are getting a fair price for their animals. Spot prices are a factor in some instances in setting formula prices.
Further, some small farmers and ranchers say they get short shrift when they market their cattle because packers prefer to deal with large feedlots or turn to the spot market only when they are short of contract cattle.
To assure robust price discovery, an economics phrase for setting a representative price, for slaughter cattle, the “75% plan” would require packers to buy routinely a specified number of cattle through negotiated trade; it would include the cash market and purchases at an agreed-upon base price, from which premiums are added or discounts are subtracted. The “weekly trade obligation” would range from 9,750 to 27,000 head in four cattle-producing regions, with a U.S. total of 64,500 head. By comparison, the USDA estimated 654,000 head of fed cattle were slaughtered nationwide last week.
The “75% plan” gets its name because packers would be obliged to buy at least 75% of the “weekly negotiated trade volume that current academic literature indicates is necessary for ‘robust’ price discovery.” They would have to do so for at least 75% of the weeks in a calendar quarter, with each of the four major packers satisfying at least 75% of their individual targets for cash purchases.
If there are repeated, widespread failures in two out of every four quarters, the task force that wrote the plan “will recommend that NCBA pursue a legislative or regulatory solution to compel robust price discovery,” said Smith in the letter. “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.”
Grassley said he expected his minimum-purchase bill would be “a major issue” in Congress in 2021. The bill, with six other sponsors, would require packers to buy at least 50% of their weekly volume of slaughter cattle on the open market. When the bill was filed in May, sponsor Montana Sen. Jon Tester said the bill would “force meatpackers to engage in more spot transactions, bringing up formula prices and making them more accurate,” to the benefit of all cattle producers.
Nebraska Sen. Deb Fischer filed a bill in late September to set by region a minimum number of cattle for packers to buy on the cash market and to require packers to report daily the number of cattle that each has scheduled for slaughter for the next 14 days.
In a 16-page explanation of its plan, the NCBA said it hoped the voluntary framework would go into operation at the start of 2021. “The subgroup is hopeful that a packer participation silo can be finalized in the coming weeks,” it said. The trade group representing meatpackers was not immediately available for comment.
In July, the meatpacking industry warned against sweeping changes in the name of market transparency that it said would disrupt the intertwined cattle feeding and beef processing system. Also in July, the USDA outlined possible regulatory or legislative modifications to the marketing system to improve price transparency.
The NCBA description of its voluntary price discovery plan is available here.