The fed cattle marketplace has changed — or so it seems to many observers and analysts. BEEF magazine collaborated with several economists in a mail survey of cattle feedlots to find some answers.
The survey had two objectives: learn how marketing and pricing practices have changed and will change; and find what cattle feeders are thinking about mandatory price reporting and other marketing/pricing issues.
Pricing And Marketing
For the periods 1995-2000, and projecting to 2005, some distinct trends are evident. Live weight pricing is giving way to grid pricing. Figure 1 shows a sharp decline in live weight pricing, a marked decline in carcass weight or “in the beef” pricing, and a definite increase in grid pricing.
Grid pricing requires some base price in addition to the premium-discount schedule. Feeders indicated that formula prices tied to the cash market (plant average or a market quote) have been and will continue to be the most popular method of finding the base price.
However, 60% of responding feeders expressed a preference for negotiated prices over formula prices. And more than 70% agreed that if formula pricing is used, the reference market should be the boxed beef or retail market. This method ties fed cattle prices to prices for which packers have an incentive to push upwards when they can — because it means more revenue to them.
Another clear trend was in the use of alliances, cooperatives or similar marketing programs. Figure 2 shows a sharp reduction in cattle feeders who have not participated or expect not to participate in some sort of agreement.
Concurrently, those expecting to be part of an alliance, cooperative or marketing program by 2005 increased.
Motives For Changes
Primary motives for grid pricing were access to carcass data, higher base prices and the ability to receive carcass premiums. Grid pricing did not enhance competition among buyers, reduce risk or lead to better financing, according to respondents. A total of 55% disagreed that packers pressured them into using grid pricing. However, another 20% did feel pressured by packers.
Some motives for using supply contracts or marketing agreements were similar to those for grid pricing, but distinct differences were noted. Primary motives, as with grid pricing, included access to carcass data and to carcass premiums. But, receiving a higher base price was not as important as it was for grid pricing.
Also important was reduced time spent marketing fed cattle and having a known buyer for the cattle. Of respondents, 45% did not feel pressured by packers to enter into contracts or agreements, while another 30% did feel pressured.
Competition And Captive Supplies
Some 70% of respondents thought reduced trading in the cash market was detrimental to the industry. And, 85%, thought packer bids were lower when packers have cattle contracted.
Should we eliminate captive supplies? Some 60% favored limiting packer ownership of cattle. But there was less agreement regarding limiting contracting. More feeders favored limiting contracting with feeders (<40%) than eliminating contracting with retailers (20%).
Competition among packers remains a concern, especially given that bids for cattle sold declined and were expected to decline further over the next few years. Is a breakup of packers the solution?
Yes, said 45% of respondents, but 30% said no. What about producer-owned packers? More producer-owned packers were seen as beneficial to the industry by more than half the respondents, while just 15% disagreed.
Mandatory Price Reporting
Has mandatory price reporting (MPR) been the magic bullet many expected? Not according to responding feedlots. Note the survey was conducted about six months after MPR took effect.
At that time, more than 75% agreed that MPR was less beneficial than expected. In addition, 60% indicated it was not benefiting the industry.
What were the perceived weaknesses of MPR? Of feeders responding, 70% disagreed that MPR provided more cash price information on fed cattle. And, 50% disagreed that MPR provided more information on boxed beef prices.
Did MPR enhance information needed for grid pricing? Not for base prices, according to 65% of respondents; and not for carcass premiums and discounts, according to 60%.
Did it provide better information for negotiating with packers? No. Nearly 80% of respondents did not think it helped in negotiating cash prices, formula prices or carcass premiums and discounts.
Overall, more than half the respondents felt MPR did not provide timely, frequent reports. In fact, 60% of respondents were inclined to use private market information sources rather than the USDA reports.
Results suggest more work is needed to improve the MPR system.
This summary represents information from a limited number of feedlots, so a follow-up, broader survey is planned this year. However, one point is clear. The fed cattle marketing and pricing landscape has changed, and continues to change. With changes come potential and real problems, as well as many potential and real solutions.
Sorting out the potential from the real is tough.
Clem Ward is a professor and Extension economist at Oklahoma State University in Stillwater.
BEEF magazine mailed the questionnaire to just under 3,000 feedlots in August 2001. About 90 feedlots, most with a one-time capacity exceeding 1,000 head, responded. Respondent feedlots represented about 15% of fed cattle marketed in 2000 by feedlots in the 1,000-head or larger size category.
Cooperating economists were Clem Ward, Oklahoma State University; Ted Schroeder, Kansas State University; John Lawrence and Marv Hayenga, Iowa State University; Wayne Purcell, Virginia Tech; Steve Koontz, Colorado State University; and Dillon Feuz, University of Nebraska.