USDA data indicate that only one of the five major cattle feeding areas in 2012 sold the majority of its cattle on the cash market.
Where’s the cash market? That’s the question more cattle feeders are asking, with good reason.
The cash live cattle market is now so thinly traded in Texas that negotiated sales are as scarce as proverbial hens’ teeth. It’s little wonder that cattle feeders there have been meeting to address the issue. But their options, as for cattle feeders elsewhere, appear limited.
Angst over the diminishing cash market is nothing new. Concerns in the mid-1990s led to numerous discussions. One was a price discovery conference in 1997 convened by the Research Institute on Livestock Pricing at Virginia Tech.
The focus was on how to realign price discovery to a more value-based system. Participants agreed a new pricing mechanism was needed, based on a mix of prices, including retail and wholesale beef prices, byproduct values, and cash and futures live cattle prices. Out of this came the Boxed Beef Calculator developed by Kansas State University’s Glenn Dolezal.
However, this and other efforts to introduce a new mechanism went nowhere. This forced the industry to embrace value-based marketing, with the development of private marketing agreements between cattle feeders and packers. Numerous pricing grids emerged, focused on carcass characteristics. The result though was that the negotiated cash market for live cattle got smaller as more cattle became priced on a formula, albeit still based on the cash market.
That’s where the market is today, but it’s far more thinly traded than 15 years ago. The reason is feedlots’ widespread use of beta-agonists. Their use demands a narrow marketing window if cattle feeders are to get the full monetary benefits from their use. This narrow window has meant much less flexibility in marketing cattle.
Thus, cattle feeders turned to more marketing agreements with packers to guarantee shackle space each week, which means more cattle than ever are priced on formulas. Some are based on the national cash market, some on the area market, and some on plant averages. The result is that the fewest live cattle in history are now sold on the negotiated cash market. Yet it still remains the basis for most formula pricing.
USDA data indicate that only one of the five major cattle feeding areas in 2012 sold the majority of its cattle on the cash market. Iowa-southern Minnesota sold 56.2% of all its cattle this way, according to packer transaction data. Packers say most cattle feeders in the region, which includes Illinois, don’t use beta-agonists: hence the large cash trade.
In contrast, these products are widely used on the Southern Plains (Texas, Oklahoma and New Mexico) and in Colorado. So the cash trade there has declined to 10%-12%. The cash trade in Kansas in 2012 was about 28%. Even in Nebraska, the cash trade declined to 39% in 2012 from 60% in 2009, says Jeff Stolle, Nebraska Cattlemen’s vice president of marketing.
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The cash market may have thinned even more this year. The Texas Panhandle region traded 90,165 cattle over the July 4 holiday week, according to Texas Cattle Feeders Association data. Only 6.1% were cash sales; the rest were formula sales. The cash percentage the week before was 5.9%. If those formulas were based on the area market, it means that precisely six cattle priced the other 94.
No wonder cattle feeders are wondering what to do and are likely looking at new pricing mechanisms. But here’s the rub. The wholesale beef market is now dominated by formula pricing as well. Up to half of all beef sales reported week are formula sales, based on the previous week’s spot market prices.
So the idea of using a mechanism such as the Boxed Beef Calculator is dead in the water. But are cattle feeders prepared to stop using beta-agonists to restore the cash market? I doubt it.
Steve Kay is editor and publisher of Cattle Buyers Weekly (www.cattlebuy
ersweekly.com). See his weekly cattle market roundup each Friday afternoon at beefmagazine.com.
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