A monthly column written for Beef Central by US meat and livestock industry commentator, Steve Kay, publisher of US Cattle Buyers Weekly

THE US beef industry for many years wrung its collective hands about the declining negotiated cash market for cattle bought live.

Organisations like the National Cattlemen’s Beef Association and its predecessor spent countless hours in public and private meetings trying to find ways to improve the sales without interfering with the market.

That they largely failed despite all these efforts was more to do with the changing nature of the live cattle market in relation to the needs of the beef market than anything else.

When I started writing about the US cattle markets in 1987, the vast majority of live cattle were sold live, on the average. Most cattle got the same price (for equivalent weight) even if their value once they became beef varied by $300 per head or more.

It was little wonder then that the industry faced a crisis, that US beef demand declined every year for two decades, and that one in four steaks was tough. The industry realised it had to act quickly.

By the late 1990s, value-based market efforts had been introduced and began to have a positive effect on beef’s eating quality and consistency. Marketing agreements between packers and cattle feeders became commonplace, with grid pricing rewarding quality and punishing inferior carcases.

It’s perhaps no surprise that the US industry doesn’t seem to care that negotiated cash sales (ie animals bought on the hoof, $/lb) are back at their historic lows after a surge in such sales in 2016, 2017 and 2018.

Cash sales accounted for just over 50 percent of total cattle purchases in 2005, but had declined to only 21.3pc by 2015 as formula-priced sales grew to more than half of all slaughter cattle transacted.

Cash sales grew to more than 25pc of the total in each of the next three years, but then fell to only 20.9pc in 2019. They increased to 23.4pc in 2020 but fell to 19.5pc in 2021 and to 20.4pc in 2022.

Cash sales in the first quarter this year represented 19.3pc of the total and in the second quarter 20.1pc.

As noted, formula sales (see descriptions for four main US cattle selling methods below) increased rapidly over the past ten years or so. They represented 54.8pc of total sales in 2012 and have remained above that percentage ever since.

The last five years saw them over 60pc at 61.1pc, 64.8pc, 62.7pc, 61pc and 61.5pc in 2022.

They were at 63.8pc in the first quarter and at 61.8pc in the second quarter. Forward contract sales in ten years since 2000 averaged more than 10pc of total sales, with a high of 17.5pc in 2015. But they fell to 8.9pc in 2020, to 10.9pc in 2021 and to 8.9pc in 2022. They averaged only 6.8pc and 7.3pc, respectively, in the first two quarters of this year.

The most interesting trend in the past five years among the four purchase types reported by USDA* has been the increase in negotiated grid sales, especially in Kansas.

This represents a desire by cattle feeders to get the best possible return on high quality cattle, as well as a willingness by packers to pay a premium to the cash market for that quality.

Negotiated grid sales represented 9.9pc of total purchases in 2000 but steadily declined after that to a low of 3.3pc in 2019. But they increased to 5pc in 2020, to 8.6pc in 2021 and to 9.2pc in 2022.

Grid sales in Kansas were negligible for many years until 2020 when they represented 3.7pc of all sales. They then surged to 9.3pc in 2021 and to 16.7pc in 2022. Grid sales now account for at least two-thirds of all sales reported to USDA by Kansas cattle feeders.

Drought implications

Meanwhile. US cattle producers remain resilient and optimistic, although the implications of widespread drought and large herd liquidation will likely continue to be uncovered over the next several months.

Cattle producers faced tough decisions, yet remain optimistic about the future of the industry, said analyst Michelle Rook on AgDay recently.

Herd liquidation has led to the projected 2023 US calf crop to be 2.5 million head smaller than its recent peak in 2018, says Derrell Peel of Oklahoma State University. These low numbers in the cattle cycle have pushed cattle prices into all-time highs and these prices could stay around for a while as rebuilding will take time, Ms Rook said.

A majority of economists who were surveyed in August when they think cattle herd expansion will start to take place believe cattle contraction will continue for at least another year.

Additionally, a smaller percentage think it could happen in the second quarter of 2024. Despite the challenges, the recent Drovers State of the Beef Industry survey showed that cattle producers remain resilient.

Two-thirds of respondents called themselves optimistic about the industry and its future. Additionally, the survey found that:

• 38pc plan to grow their herd in the next five years
• 49pc say their operations will at least stay the same in the next five years
• 54pc of operations plan to add a family member in the next five years
• 10pc said they considered exiting the business
• 66pc said that exiting the business was never a consideration.

The hope is that this market will provide an opportunity for the next generation, Ms Rook said.

* USDA reported cattle purchase types:

Negotiated purchase, also known as a spot market purchase, is where the price is determined through buyer and seller interaction and the cattle are scheduled to be delivered to the plant within 30 days of the agreement. The packer reports these purchases as scheduled for delivery in either 0-14 days or 15-30 days.

Forward contract purchase is an agreement for the purchase of cattle, executed in advance of slaughter, where the base price is established by reference to prices quoted on the CME.

Negotiated grid purchase is where the base price is negotiated between buyer and seller and is known at the time the agreement is made, and delivery is usually expected within 14 days. However, the final net price is determined by applying a series of premiums and discounts based on carcass performance after slaughter. The base price is submitted when established. The net price is submitted after slaughter and carcass grading has occurred.

Formula purchase is the advance commitment of cattle for slaughter by any means other than negotiated, negotiated grid or forward contract. Formulas use a pricing mechanism where the price is often not known until a future date.