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Editorial: Truth in pricing

Canfax enhances price reporting

With all the celebrating last month over yet another win for the anti-COOL forces at the WTO another significant bit of news may have slipped your notice.

In a note to subscribers Brian Perillat and his team at Canfax finally let it be known that they are starting to collect price information on cattle sold by grid formulas and forward basis contracts in addition to cash prices.

I say finally because Canfax has been researching and thinking about this move for more than a year now, and it is a welcome addition.

The need for it has been clear for some time with the precipitous decline in the number of fed cattle being sold on the cash market. Alberta’s cash trade more or less held around 63 to 65 per cent of marketings until 2009. By then we had cleared out a million and a half head from our bloated herd and were getting back to pre-BSE numbers.

In response people started to worry about how far down the numbers would go, so grid and contract sales became more popular. By 2011 cash sales were down to half the trade, then 40 per cent in 2012 and down to 23 per cent in 2013.

Put another way the weekly average number of cash cattle reported to Canfax declined from a high of 6,505 in 2010 to 1,705 in 2013. In the first four months of 2014 it was down to 793 head per week.

At the same time grid sales went from 17 per cent of the total in 2008 to 29 per cent in 2013. Of course, grid cattle are generally based on the cash plus or minus premiums or discounts for quality. That can be a bit problematic at times when the cash trade is so thin it can’t be reported with any accuracy.

It’s perhaps telling that the same issue of the Canfax weekly newsletter where Perillat announced this change, no Alberta prices were reported for fed steers or heifers.

The biggest growth has been in contract cattle, which grew to 48 per cent of the trade in 2013 from seven per cent in 2008. Not too surprising when you realize grid deals are favoured more when large premiums are available and forward contracts when supplies are tight.

Of course none of these contract or grid cattle are reported, which is the nub of the matter.

The thinning of the cash market by itself is not the problem. The cash just happens to be the most transparent value that can be reported and used up and down the supply chain. In short it’s the base price for the business.

It is also used to set coverage and premiums for cattle price insurance and AgriStability claims. There is an even wider concern since the base cash price is used to calculate losses on the value of cattle and beef moving to the U.S. due to the COOL program.

There are others ways to come up with a base price, of course, and over the past year or two researchers have been looking at the ups and downs of mandatory price reporting, live cattle future prices and the cut-out value set between processors and retailers.

Some have potential in the U.S., where the cash is also plunging, but less so in Canada. With the futures price set in the U.S. we still have exchange rate and basis risk and policy risk such as COOL that interferes with arbitraging values across the border. Cash prices are also needed to calculate the cash-to-futures and cash-to-cash basis which are key to comparing Canadian prices relative to the U.S. A cash price also supplies the historical data needed to calculate premiums and coverage levels in price insurance and stabilization programs.

Consequently Canfax is reluctant to give up on the cash market. In the past it has built up an envious record for accurately reflecting market value based on voluntary price reporting by feedlots. Now it is asking them to trust Canfax with their grid and contract sales, as well.

What they are asking for is the settlement price for grid sales, net the discounts and premiums after slaughter. U.S. grid sale data are being collected for comparison. On contract sales they are asking for volume and prices or basis levels for forward sold cattle, by month.

As with cash reporting, all marketing data remains confidential. At this stage that means enhanced price information will be distributed only to those feedlots that contribute price data. None of it will be publicly reported, primarily because so few feedlots are reporting at the moment that releasing the data could compromise their competitive positions.

It can be used to check the validity of the present cash market, however, and that, by itself, is of real value. In time, as more feedlots sign up, perhaps the numbers will be large enough in all categories to ensure anonymity so it may be added to the public reports.

Longer term, once cattle numbers do start to increase the cash market should come back into vogue. In the meantime we congratulate Canfax on its new venture and hope for its success.

Truth in pricing — we all need it.

About the author

Editor

Gren Winslow

Gren Winslow is a past editor of Canadian Cattlemen.

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