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Dittmer: A framework and the lack of patience

Free Market Reflections with Steve Dittmer

NCBA’s task force subgroup on cash marketing released a proposal, A Voluntary Framework to Achieve Robust Price Discovery in the Fed Cattle Market, in October.

The framework delineates both minor and major triggers, with weeks where either the negotiated trade or the packer participation does not meet their obligated targets designated as minor triggers. Three minor triggers in any quarter add up to a major trigger. The framework will use the five USDA regional designations — except that for the framework only, Nebraska and Colorado will be combined to handle non-reporting confidentiality.

At NCBA’s mid-year marketing committee meeting the discussion centred around cattlemen. There was difficulty in getting input from packers under federal investigation.

But the framework recognizes that packers have to agree to participate. Both alternative marketing arrangements (AMA) and negotiated cash trades need two parties. The framework shows two “trigger silos,” a negotiated trade silo and a packer participation silo. To gauge “robust” price discovery, there needs to be sufficient weekly negotiated trade between both.

The subgroup will look at the weekly data for each quarter, based on livestock marketing reports data on a regional basis for each silo. Weekly trade must hit 75 per cent of its regional target at least 75 per cent of the time in the quarter to avoid a major trigger violation. The negotiated trade silo and the packer participation silo will be evaluated separately.

If a major trigger is tripped during two of any four consecutive quarters, then the subgroup is obligated to recommend NCBA pursue regulatory or legislative measures.

Importantly, negotiated trade will include both spot cash trade or negotiation of a base price from which a grid or AMA transaction occurs.

With Stephen Koontz consulting, (ag economist at Colorado State University), the subgroup determined the trigger levels as follows:

  • Texas, Oklahoma, New Mexico – Robust: 13,000; 75 per cent obligation: 9,750.
  • Kansas – Robust: 21,000; 75 per cent obligation: 15,750.
  • Nebraska, Colorado – Robust: 36,000; 75 per cent obligation: 27,000.
  • Iowa, Minnesota – Robust: 16,000; 75 per cent obligation: 12,000.

Each packer will be responsible for participating at adequate levels. USDA-AMS does not publish the needed participation data but NCBA and AMS are working to accomplish that.

NCBA plans to implement the framework on January 1, 2021, with the first quarterly analysis with March data. The subgroup will evaluate the negotiated trade volume even if the packer participation silo isn’t ready. It will evaluate any major disruptions on a case-by-case basis and make adjustments. It will meet quarterly to monitor the framework and determine any adjustments.

The framework recognizes that this process is unprecedented but actual objective data and responsibility must be measured and imposed on the industry itself to make progress.

After the framework was released, a long list of NCBA-affiliate associations — mostly but not all cow-calf and stocker operators — ignored the framework and went straight to Congress.

Some 17 cattlemen’s groups signed a letter to congressional agriculture committees requesting hearings on Nebraska Senator Deb Fischer’s bill.

That bill calls for a contracts library, more marketing information and within one year, the “Secretary shall establish regional mandatory minimums,” established by USDA-AMS, of the “quantity of cattle purchased for slaughter by a packer in that region each slaughter week, the minimum percentage of such cattle that is required to be purchased through negotiated cash purchases or negotiated grid purchases….” The requirements would apply to federally inspected processing plants over 481 head per day.

Of the associations, only four — Illinois, Iowa, Nebraska and Minnesota — would have significant numbers who regularly sell fed cattle directly to packers.

Typical of groups petitioning Congress, these affiliates are asking Congress to do something to someone else — feeders and packers.

The associations said cattlemen were recovering from two “black swan” events: the August 2018 Tyson fire and the COVID-19 pandemic processing bottlenecks.

“This legislation would assist producers as they fight to recover from residual consequences and provide long-term structural changes to the cattle markets,” they said in a news release.

The associations are lumping two issues together. Those black swan events were in the “acts of God” category. You can pray they don’t happen but they’re not preventable by Congress. We may never see anything like either again.

That leaves the “long-term structural changes to the cattle markets.” Assigning “long-term” and “structural changes” to Congress is frightening. Congress would be making fundamental changes to a system that has proven itself successful in improving beef, consumer demand and consumer prices.

Americans panicked at beef shortages. They’re returning to pay $15-$20 for a Choice rib steak or double that at a steak house.

The problem: the cow-calf operator is not a margin operator. He/she is first in the production chain going out and the last in line when the money gets passed back. That’s biology and the production chain. Retained ownership, breed programs, AMAs and alliances were partially attempts to allow the first/last guys a share of profit later in the chain.

Not all complex problems have a perfect solution. But Congress and government bureaucrats are unlikely to have the solutions.

About the author

Contributor

Steve Dittmer is the CEO of Agribusiness Freedom Foundation, a non-profit group promoting free market principles throughout the food chain. He can be reached at [email protected]

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