Reviewing A Mandatory Minimum
Level of Negotiated Transactions
The Current Picture
There are a variety of market transactions through which cattle are marketed in the U.S. Thankfully, due to Livestock Mandatory Reporting, we have the data to be able to understand how these animals change hands and how these methods have evolved over time. There are four primary transaction types reported by USDA through LMR.
Negotiated purchases, often referred to as the “spot” or “cash” market, are where the price is determined through buyer and seller interaction on the day of sale. Forward contract purchases are an agreement for the purchase of cattle executed in advance of slaughter, where the base price is established. Negotiated grid is where the base price is negotiated between buyer and seller and is known at the time the agreement is made. The final net price is determined by applying a series of premiums and discounts based on carcass performance after slaughter. Formula purchases is the advance commitment of cattle for slaughter by any means other than negotiated, negotiated grid or forward contract. Formula pricing uses a pricing mechanism in which the price is often not known until a future date.
Over the past 15 years, we have seen a dramatic shift in the way cattle are marketed. In the mid-2000s, roughly 50%-60% of cattle sold were through the negotiated market. Over time, this method of marketing fed cattle has declined and been replaced by formula transactions. We have seen the negotiated market fall from 50%-60% of transactions to roughly 20%, and at the same time we have seen formula transactions increase from roughly 30% to 60%-70% of transactions. Over that same period, we have seen a slight decline in negotiated grid transactions and a fluctuating volume of forward contract transactions.
Live vs. Dressed Marketing
Cattle can also be marketed on a live or dressed (carcass) basis. Over the previous 10 years, we have seen a moderate shift even further away from live marketing to dressed marketing. In 2010, just under 60% of fed cattle transactions were on a dressed basis while just over 40% of transactions were on a live basis. Last year the percentage of dressed transactions had increased to 75% and the percentage of transactions on a live basis had declined to 25%.
Regional Differences in Transactions
It is also important to understand that types of transactions vary by market regionally. Negotiated trade is more common in certain states, such as Nebraska and Kansas, which have seen negotiated percentage ranges from 40-75% in recent years. Other states typically have very little negotiated trade. In Texas and Oklahoma, for example, negotiated trade accounts for only 5-8% of cattle transactions. These discrepancies between regions contrast with the national picture, where we see negotiated trade around 20-23%.
AFBF Supports Producers’ Freedom to Enter into AMAs
To maintain producers’ freedom to enter into progressive, value-added cattle pricing arrangements and contracts, AFBF delegates oppose a mandatory minimum for negotiated cattle slaughter. There can be no doubt that mandates on negotiated cash trade ultimately limit the use of AMAs. While more negotiated trade would further bolster price discovery, a minimum negotiated trade threshold means that the federal government must monitor and maintain the minimum, inviting further government intrusion into the industry. Furthermore, this additional regulation likely won’t solve the problems it is purported to solve and could potentially result in negative consequences for the industry.
A key point to remember when discussing the optimal level of negotiated transactions is that PRICE DISCOVERY is not the same as PRICE DETERMINATION. While enhanced price discovery is a good thing, it does not necessarily mean it will result in higher prices (as many proponents of minimum thresholds contend). It is critical to note that the black swan event that is the COVID-19 pandemic and its impact on our country’s economy is an unprecedented exogenous shock to the overall food system and supply chain. No amount of negotiated trade would provide relief from supply chain challenges of this magnitude.
There are many conversations happening in the countryside about how cattle are marketed in the U.S. Many of these conversations have focused on establishing a minimum threshold for certain types of cattle transactions. We can and should promote a more robust price discovery system, but not at the expense of producers’ ability to utilize value-based, consumer-driven marketing arrangements. AFBF’s producer members realize that producers, not the federal government, know the best course of action for their individual operations and that there is no easy one-size-fits-all solution.