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Kay’s Cuts: Price discovery worries US producers

Guest Author, 14/08/2020

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

 

 

 

 

 

 

I READ with interest Beef Central’s recent story that Australian slaughter cattle are now officially the most expensive in the world among major beef exporting nations.

As Jon Condon says, Australian prices in the past ten years have only rarely topped equivalent US prices, in Australian dollar terms.

This has occurred this year because US grainfed (live) cattle prices remain well below year ago levels, despite enjoying an unexpected rally throughout July and into the first week of August.

The last week of July saw USDA’s five-area steer price averaged US$98.66 per cwt live. This was down 13.3pc from the US$113.82 per cwt average of the same week last year.

This reveals that while the US beef processing sector has largely recovered from the ravages of the COVID-19 pandemic, US cattle feeders are still getting far less for their cattle than last year, because of the huge feedlot backlog caused by the pandemic.

Abattoir fire, COVID closures distort market

It is no surprise, then, that cattle producers have refocused their attention on prices in the live cattle market. In fact, calls for inquiries began in the aftermath of an August 9, 2019 fire at Tyson Food’s Holcomb, Kansas, beef processing plant that put the plant out of commission for most of the rest of the year. This caused a collapse in futures and cash live cattle prices.

There was a marked drop in the number and percentage of negotiated cash sales of live cattle immediately after the fire. Then the COVID-19 pandemic struck the beef complex this spring, causing unprecedented market distortions in cattle and wholesale beef prices until early June.

The two events thus led to new concerns about price discovery and transparency, and about the small percentage of cattle sold on the cash market. Negotiated cash sales fell sharply after the Tyson fire, and also at the height of the pandemic when beef plants nationally ran at only 68pc of capacity.

Investigation

The fire led to US Agriculture Secretary Sonny Perdue to direct USDA’s Agricultural Marketing Service to conduct an investigation. He directed it to look for evidence of whether any regulated entities during the two events violated the US Packers and Stockyards Act by taking advantage of the situation through price manipulation, collusion, restrictions of competition or other unfair practices.

He then expanded the investigation to include the market’s behaviour during the height of the pandemic.

Not unexpectedly, AMS in a report released last month said found no infringement by industry stakeholders related to either event. Much of its report instead focused on its efforts to continue to explore ways to enhance price discovery and transparency in the live cattle market.

Its first suggestion was to reduce non-reporting. A combination or reshuffling of reporting regions, a change that could be made without legislative action, could ultimately expand the market data released to the public, says AMS. But it notes that there has not been industry consensus on such a recommendation to date.

USDA is also exploring the idea of no longer referring to the daily slaughter report as an estimate to encourage the market’s immediate use of the information. I can’t imagine how such a move would make any difference. Ironically, the eight weeks of data from the first week of June saw 76,818 head fewer cattle in the actual weekly slaughter totals versus AMS’s initial estimated totals. That is reason enough for people to ignore the estimated total even more.

AMS has also explored a 14-day slaughter scheduled delivery submission requirement through livestock mandatory reporting, a precedent currently in place for daily LMR swine reporting.

Beyond LMR, the concept of creating and compensating a pool of negotiated cash market traders has been explored by some in academia and industry, says AMS. With further development and discussion, the idea may prove an innovative and flexible approach to solving the public good problem of a lack of reliable price discovery, it says.

Cattle producers discuss price discovery issues

US cattle producers discussed these and other price discovery issues at their summer meeting last week. After intense discussion, a committee and then the National Cattlemen’s Beef Association’s board of directors unanimously passed a policy that supports voluntary efforts to improve cash fed cattle trade during the next 90 days, with the potential for mandates in the future if robust regional cash trade numbers are not reached by the industry.

The policy resolution also said that if the voluntary approach does not achieve robust price discovery as determined by NCBA-funded and directed research, and meet the established triggers that increase frequent and transparent negotiated trade to a regionally sufficient level, and triggers are activated, NCBA will pursue a legislative or regulatory solution determined by its membership.

It thus seems the US industry continues to hope that cattle producers voluntarily will sell more live cattle on the negotiated cash market. Few producers, except those who strongly distrust packers, want to see mandatory measures that would inhibit producers’ rights to choose how they sell cattle.

Therein lies the conundrum about price discovery in the market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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