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Dittmer: Natural progression, voluntary adjustment and coercion

Free Market Reflections with Steve Dittmer

There is much discussion down here about the negotiated cash market, alternative marketing arrangements (AMA), the “30/14” idea and proposed federal legislation to force more negotiated cash sales (50/14).

With the percentage of cash market sales in the 20 per cent range, cattle feeders who often sell cash and those who use AMAs (like formulas), are more concerned.

But AMAs have come to account for 70 per cent of marketings because they afford both feeders and packers advantages. Bolstering the cash market is tough. The loudest voices against AMAs resemble salmon swimming upstream, because feeders can make more money and save costs through AMAs. The bigger packers need the speed and efficiency provided by a steady stream of AMA cattle.

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Several events are converging. The slowing and closing of big plants during the COVID-19 pandemic this spring disrupted the beef supply, caused boxed beef prices to soar and retailers to chase a small beef supply. That was a short-term market distortion caused by extraordinary conditions.

The most vociferous critics of the markets, packers and bigger feeders claimed the major price movements were just amplifying normal dysfunctions and called for drastic measures. But many feel basing long-term major moves on historically unprecedented events is an overreaction.

One movement calls for 30 per cent of all plant needs to be procured cash and delivered within 14 days. Many supporting this were not feeders but some were smaller feeders that often sold cash.

Senator Charles Grassley (R-Iowa) resurrected a bill he had repeatedly introduced for years. He upped the ante though, requiring all major packing plants to procure 50 per cent of their needs each week through negotiated cash, requiring delivery within 14 days.

Separately, a federal investigation that was ongoing from last summer’s market disruption from the Tyson Kansas fire was expanded to include this spring’s market response to COVID-19.

Canadians might not be familiar with the U.S. Mandatory Price Reporting (MPR) program. It requires most packers to report a large volume of information, including cattle prices paid, purchase method, beef sales, plant profitability and much packer operating data. Economists have examined that data and found out much about how packers operate.

Stephen Koontz, an agricultural economist at Colorado State University, has been one of the leading analysts of MPR data, as well as extensively interviewing cattle feeders and packers to get first-hand knowledge supplementing that data.

Koontz produced nine possible options, in any combination the industry wanted, to begin bolstering the cash market. Here are perhaps the most likely, numbers five through eight:

5. Standard Business Practices: One step would be creating an entity to formalize and enforce standard business practices for cash sales transactions and trade reporting rules. The grain trade has such an entity, a committee which sets rules for grain trade, feed trade, barge trade, barge freight and rail freight. Payment, freight, quality and delivery timing rules are specified without dictating terms of trade or creating leverage for any party. Both packers and feeders would be involved.

6. New Marketing Information: There are two risk factors that inhibit cash market participation each week. For feeders, it’s not getting the showlist sold; and for packers, not getting sufficient volume bought.

More information than that in the Cattle on Feed report could help. Both parties need to know anticipated marketings and purchases by region. Aggregated needs by packers and feeders for eight to 12 weeks out would do that, enabling adjustments. Koontz notes that everyone estimates this information and everyone will know eventually — just too late to avoid problems.

7. Market Makers: Major stock exchanges have market makers, whose job is to always be in the marketplace and provide liquidity. The cattle industry would need to fund a market maker or provide fed cattle for cash trading. Market makers are compensated, either directly, through commissions or through buy/sell market opportunities. The industry, or perhaps the government, could fund it.

8. Permits or Certificates: This system would require all significant cattle feeding operations to obtain permits to trade a specified percentage of the total fed cattle in the cash market. Operations that exclusively market through AMAs could transfer their permits to other operations. The transfers could be worth whatever the industry decides is fair compensation to get a cash market. The cash market feeders would get the transfer fee. For example, Koontz explained that if 90 per cent of the cattle traded through AMAs, at a 50 cents/head transfer fee, the 10 per cent cash market traders would get $4.50/head for supporting and using the cash market. This would involve an industry-regulated mandate.

Koontz made key points to NCBA, given the data he’s analyzed. First, either the 30/14 idea or 50/14 legislation would cost the beef industry millions, if not billions, of dollars annually. Second, the value-based alternatives to cash selling saved the beef industry from its headlong dive in beef demand from 1980 until 1998. Third, forward contracts benefit feeders from $15-$25/head and formula arrangements add from $25-$40/head.

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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