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Kay’s Cuts: MLA should re-evaluate Mandatory Price Reporting’s value

Steve Kay, Cattle Buyers Weekly, 14/06/2016

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

 

 

Steve Kay 2013 conferenceACCURATE, comprehensive and timely information is the lifeblood of all livestock and meat markets. So I read with great interest Meat & Livestock’s report on introducing US-style mandatory price reporting (MPR) for cattle and beef in Australia.

In case you missed Beef Central’s excellent summary of MLA’s report, here are some of the points highlighted in the article, and my response to them.

MPR in Australia will benefit producers, but only in a small way. On its own, the move will be no silver bullet to securing higher farm-gate prices as many may have imagined, he wrote.

I somewhat agree with the latter point. The US for years had a voluntary price reporting program conducted by USDA’s Agricultural Marketing Service.

It was a good program but some producers felt a mandatory program would uncover sweetheart deals between producers and packers. So they spent the best part of ten years pushing MPR. Their efforts culminated in the 1999 Livestock Mandatory Price Reporting Act.

At the time, USDA said MPR was developed to facilitate open, transparent price discovery and provide all market participants, both large and small, with comparable levels of market information for slaughter cattle, swine, sheep, boxed beef, lamb meat, and wholesale pork.

No sweetheart deals

MPR has very much lived up to this promise. But to the disappointment of some producers, it never uncovered any sweetheart deals, because there were none.

MLA says some significant benefits are possible from MPR but only if the move to improve price transparency leads to the introduction of a system that makes it easier for producers to easily and accurately compare different grid prices from different processors, and is accompanied by the introduction of an Australian futures market* for cattle and beef and/or an industry-wide move towards value-based marketing.

My observations of the introduction of MPR in the US are that it was challenging for producers initially to compare price grids. But this disappeared as the move to value-based marketing accelerated. Producer groups, individual packers and breed associations all worked together to make grid pricing comprehensible and as uniform as possible.

MPR’s introduction in the US never linked to the futures market

As for requiring the introduction of a futures market, MPR’s introduction in the US was never linked to the futures market. It was and always has been as a mechanism for the future discovery of prices, not the capturing of current prices or their transparency.

MLA’s report also says that 95pc of price discovery in US cattle markets emanates from the futures market. I have no idea who came up with this number and what their definition of price discovery is. Most price discovery takes place through USDA’s daily reporting through MPR of cattle and wholesale beef sales.

Only the nearby live cattle futures contract serves as a factor in real-time price discovery. Yet the futures market’s extreme volatility in the past 18 months has many people arguing that the market has greatly diminished that factor.

The June live cattle contract at times in the past two months has been heavily discounted to cash prices.

If the futures accounted for 95pc of price discovery, cash prices would have been much lower. They weren’t. For example, the June contract closed at US $122.00 per cwt last Friday (June 3). Cash prices for the week averaged US $129.29 per cwt.

Value is in move to VBM

A wider point is that if the Australian industry believes it needs to move to value-based marketing, mandatory price report would be a catalyst to push all producers and packers in that direction. MPR’s intent back in 1999 in the US was to provide all market participants with comparable information. The importance of that cannot be over-stated, as it encouraged all producers to upgrade the quality of their cattle.

MPR also transformed the procurement of grainfed cattle in the US. So I couldn’t disagree more with MLA’s comment that MPR’s introduction did not result in US processors significantly altering the methods used to set cattle prices.

Beef processors for years had bought cattle live, on the average. This encouraged producers to “bury” their poorest quality cattle in a consignment of their best cattle, and meant packers seldom if ever paid more for the best cattle.

The same “live on the average” pricing equally bedeviled the hog industry.

Today, the reverse is true. Beef and pork processors in recent years have strongly supported those who produce above-average quality cattle and hogs.

Beef packers consistently pay premiums for live cattle that grade USDA Choice or higher. Live on the average pricing meant cattle graded only 51.7pc Choice in 2006. Just ten years later, they are grading 68pc Choice or better and 5-6pc Prime.

That’s proof of the power of value-based marketing, which offers financial incentives for producers, and a much larger emphasis on quality and branded beef programs such as Certified Angus Beef (CAB).

Those financial incentives are sizeable. A survey of CAB-licensed packers (Cargill, JBS USA, National Beef and Tyson Foods) showed they paid a record US$51.8 million in CAB grid premiums in 2015 and more than US$550 million over 20 years. Against such premiums are discounts for poorer-quality cattle.

Conflicting signals

MLA’s report thoroughly confused me at times. It says that addressing gaps in price transparency and providing improved analysis is likely to result in producer benefits which exceed costs.

But it then says the net benefits for Australian producers are likely to be small. In the next breath, it says the level of market information available to Australian producers is less than their US counterparts, and suggests that increasing available information may be of greater marginal value in Australia.

Everyone single sector of the US livestock and meat industry believes MPR has been of real value.

It has helped transform the industry from a commodity-based, average price marketing system, to one that focuses on value-added programs and premiums.

MPR is invaluable as a form of price discovery and market transparency.

It also collects and makes available a massive amount of real-time data that gives every market participant a much more complete picture of the markets than they could possibly have imagined prior to 1999.

Click here to view MLA’s full report.

 

* Editor’s note: Australia has twice before tried, and failed, to implement a cattle futures contract – due mostly to lack of liquidity.

 

 

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Comments

  1. Loretta Carroll, 15/06/2016

    Many producers would love to have the Government impose a mandatory price reporting scheme upon our industry as this would ensure an appropriate flow of prices being reported on right along the beef processing chain capturing sale yard, Auction Plus, direct and over the hook sales, export and wholesale beef prices providing a far more accurate pricing system. I’m guessing unless it is enforced processors will not report accurately on over the hook sales and Mr Kay says mandatory price reporting would be a catalyst to encourage value based marketing. I completely agree with you James it would be great to use an American based grading system which appears to be a much simpler and more consumer friendly system.

  2. Peter James McHugh, 15/06/2016

    Loretta,
    Your concern on why it took 13 months for Milestone 4 to be released to the mainstream media is only compounded by the fact MLA sat on Milestone 5 as well for over 8 months ( stated in a BC Richard Norton article 14th October 2015 ) .
    Both you and I know the best guess to why the reports went public is they were directed by Minister Joyce’s office on monday 23rd May or the 24th the day before the CCA Board meeting in Canberra , due to a letter from your VFF branch to the minister’s office , plus 5 days of Emails to Richard Norton after the Angus Conference where the Ministers office was CC into these Email requesting the Milestones to be released into the mainstream media .
    I know up to Christmas / New Year CCA were reporting they had not see any reports but knew MLA had them but were remodeling ( milestone 5 )?
    Was the CCA Board in the dark along with the Australian Cattle industry until the May release.
    Peter Hall would have to shed light onto who in CCA handled the reports and decided that the preferred option was Voluntary ?
    Maybe we need more input from American experts as I believe Steven Kay has shed a light on MLA’s reporting being double talk .
    I’m sorry David but cant agree on trying Voluntary if it had any benefits why did the USA go Mandatory ?
    Feel the problem could be were MLA has 5 peak Councils who they answer to and as we know who ever is the stronger will control the group.
    Needless to say that’s not CCA at the moment till MLA Senate inquiry recommendation 1 is acted on .

  3. James Nason, 15/06/2016

    This comment posted by Beef Central on behalf of DAVID HILL, CLARKE CREEK

    Whilst I would agree that Steve Kay makes a lot of good points in this article, I would point out that many have been made before.
    CCA in response to Milestone 5 has requested MLA investigate the development of a voluntary system to capture information on boxed beef and wholesale prices, to further develop price transparency(as previously reported on Beef Central). Is this not in line with what Steve Kay claims was working well in the US before the mandatory scheme was introduced?
    “Value is in the move to VBM”, a lot of industry participants seem to agree, but if VBM is to work in this country, several changes will need to happen. Number one, would be a change to the way Australian beef is described. Steve Kay mentions USDA Choice, which is one of the categories used by USDA to describe quality in US beef. Australia currently has 3 basic categories: Veal/Beef/Bull, Beef is described as Beef*A* or Beef, which is then underpinned by Alternate Categories(BEEF) dentition and sex based ciphers like YG, YP, PR, and S, which have been shown to have no correlation to eating quality. The frustration for producers is, although we have arguably the best eating quality grading system in the world, in most cases when carcasses are graded using MSA, the producer is payed on the dentition/sex ciphers, which often sees them receiving a lower price for the better eating quality product. This added to the belief that if a export brand owner wishes to, they could default to the PR or S cipher, pack it all the same box, and market it using a company code based on (perceived) quality such as MB2+, for example. This is not the foundation for a functional Value Based Marketing (VBM) scheme.
    If VBM is to work, it must have transparency and accuracy in how price signals are relayed back to producers, so that if they wish to, they can look to produce cattle that will attract a higher value for the supply chain, if that extra value goes towards a higher farm gate price. As was mentioned in the article there has been a rise from 51.7% USDA Choice to 68% USDA Choice or better in 10 years. “That’s proof of the power of VBM, which offers financial incentives for producers, and a much larger emphasis on quality and branded beef programs”.

    As far as the paragraph under the heading ‘Conflicting signals’ goes, could I highlight the statement”every single sector of the US livestock and meat industry believes MPR has been of real value, it has transformed the industry from a commodity-based, average price marketing system, to one that focuses on value added programs and premiums, MPR is invaluable as a form of price discovery”. The comparisons of where the US was, to where we are currently, are stark. If MPR is meeting with such resistance in this country, surely we would give VPR a go, as was first done in the US, after all none of us want to write more submissions and front more senate inquiries, and have the government impose a mandatory scheme upon us? This will require a level of trust and co-operation never seen before, and never needed as much before, after all the sustainable profitability of our industry is dependant on it. – DAVID HILL, CLARKE CREEK

  4. Loretta Carroll, 15/06/2016

    Thank you Mr Kay for highlighting a number of the inaccuracies and out right blunders in Milestone 5, what you may not be aware of, is that Milestone 4 called the Assessment of price transparency in the beef supply chain provided a much more positive overview of mandatory price reporting recognising the importance of a clear transmission of price signals to promote trust and transaction integrity along the supply chain. It also states “…any increase in price disclosure will assist Australian cattle markets to work more efficiently in matching beef and co-production to customer requirements”. In regard to the nonsense in Milestone 5 about the futures market the only comment in Milestone 4 that could be found was that “Price transparency allows the implementation of derivative mechanisms such as futures and options which alleviate price volatility. It achieves this by assisting cattle producers, processors, wholesalers, exporters, retailers and foodservice operators to more quickly direct production or purchases toward areas of greatest demand…”. A point of concern is Milestone 4 was written in April 2015 by a number of consultants and than handed to Meat and Livestock Australia and thirteen months later a very different version with half the number of pages is released to the public with both Cattle Council of Australia and MLA supporting a voluntary price reporting system with limited, if any, consultation with farmers.

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