Comment: The edge

My appreciation for price discovery and other elements of ag markets began with a visit to the Chicago Board of Trade back in 2014. At that time, the futures markets had moved to electronic trading, but the corn options pit was still lively. I talked to several people who’d worked at or near the Board of Trade for years, witnessed the market opening on a Monday morning and wrote a long feature for Country Guide (if you’re inclined to read it, you can still find it on the website by searching “Chicago Trades Up”). What still strikes me is the complexity of the markets and CME Group’s efforts to make sure things were fairly level.

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“I’m one of the few people who can say that my job is to make all of our customers a little unhappy because that means they don’t have an edge in the market,” Fred Seamon, senior director of ag commodity research and commodity development at CME, told me that day.

Shifting from grain to cattle has meant hiking a learning curve. Crop producers have had different ways to hedge against market risk for a while, whether they’re contracting part of their crop or buying futures. Most cow-calf producers now have access to price insurance (imperfect, as we saw this spring, but still an improvement), although Atlantic Canada is still waiting for a program.

The pinch point, as we all know, is at the processing level. Packing capacity is mostly concentrated in two federally inspected plants in Alberta, owned by JBS and Cargill, plus Cargill’s Guelph, Ont. facility. Whether they want it or not, that gives those companies tremendous market power.

The reality is that the processing infrastructure we have today was created decades earlier. It often reminds me of the railway capacity conundrum grain growers face. Of course, railways are not buying grain, and they serve other industries, but they do have captive markets for their services in many parts of the country. And in both cases, the ideal solution would be to build more infrastructure to increase capacity, yet this is also unlikely to happen in a big way, at least in the near term. This country has lost many miles of branch lines over the years, although some short lines were conserved by producer-run co-operatives.

The days of building nation-spanning rail lines are far behind us. So until we figure out how to move grain to port through pneumatic tubes or some other means, grain growers need to push for other solutions, keep tracking rail car movement and perhaps process or feed more grain on the Prairies. There is no single solution, and even successfully deploying several solutions won’t eliminate the grain industry’s dependency on railways.

Of course, it’s more likely we’ll see more federally inspected plants built than railways. Perhaps conditions will become more favourable for provincially inspected plants as well. But I doubt we’ll see any radical changes, at least in the foreseeable future.

Radical change may not be what we want anyway, as it risks unintended consequences. Discouraging anyone who might be thinking of building a new plant, or driving an existing one under, would be disastrous. We need these processors to supply our export markets and much of our domestic market as well. Perhaps we need to employ the same approach as Fred Seamon, and come up with tactics that leave everyone a little unhappy, but no one apoplectic. Any proposals should also consider that our market is tightly integrated with the U.S.

Fortunately, better minds than mine are already turning this over. Some have written for Cattlemen in the last few months, and it’s worth reading their work if you missed it the first time.

U.S. beef producers have been discussing a few ideas. In the August issue, Steve Dittmer summarized proposals around bolstering the cash market in his “Free Market Reflections” column. He outlined a few of the most likely proposals from Stephen Koontz, an ag economist at Colorado State University. In brief, those ideas include creating a “market maker” to improve liquidity, creating an entity to enforce standard business practices, increasing the market info available to both feeders and packers and creating a permit system for all significant cattle-feeding operations to trade a percentage of fed cattle in the cash market.

In the September 7 issue of Cattlemen, Dittmer succinctly reported the proceedings and outcome of the NCBA’s live cattle marketing committee midyear meeting, which led to a resolution to increase price discovery and cash trade triggers in every cattle-feeding region. If this can’t be accomplished on a voluntary basis, the NCBA may pursue regulatory options.

Charlie Gracey also authored a discussion piece about a mechanism to rein in the extreme pricing situation we saw this spring when the plants shut down or slowed. Gracey proposed that when an external emergency threatens prices, there would be a price floor of sorts, set at a certain percentage below the three-year average. You can find that article here.

I hope this provokes some productive discussion. If you have any thoughts, shoot me an email or give me call.

We regret the error

Charlie Gracey had another article in our last issue analyzing grading trends. The chart titled “Percent Distribution of Beef Carcass Yield Classes” should have been labelled “Yield 1, Yield 2, Yield 3.” Thanks to the sharp-eyed reader who caught the error.

About the author

Editor

Lisa Guenther

Lisa Guenther is the editor of Canadian Cattlemen. You can follow her on Twitter @LtoG.

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