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Cattle, Packers and Mandated Cash Trade

Cattle, Packers and Mandated Cash Trade

By CHRIS CLAYTON

With farmers and ranchers who are members of the American Farm Bureau Federation expected to hand down policy this week on cattle marketing legislation, speakers at the annual meeting have thrown some cold water on exactly what mandated negotiated cash trade would mean to cattle producers.

Stephen Koontz, a livestock marketing Extension economist and professor at Colorado State University, told livestock producers on Monday that mandating a higher level of negotiated cash trade might provide "price discovery," but it also would likely cost producers in general about $50 a head.

"More cash trade will not result in better prices or change the market situation we've been in since 2016," Koontz said at a livestock markets outlook. He added, "There are people who argue having more packers to bid on your cattle will raise prices. That's baloney."

The Biden administration last week laid out plans to spend as much as $1 billion to add packing capacity with smaller processing facilities. The Department of Justice and USDA also stated they would provide more ways for producers to raise concerns about the packing industry. USDA also is planning to rewrite some rules related to the Packers & Stockyards Act.

See "White House Moves Against Big Packers" here: https://www.dtnpf.com/….

In Congress, the big focus is legislation introduced by Sen. Deb Fischer, R-Neb., and Chuck Grassley, R-Iowa, as well as a bipartisan mix of 12 other senators, at least nine of whom are members of the Senate Agriculture Committee.

Fischer's bill is S.3229 - Cattle Price Discovery and Transparency Act of 2021, introduced in mid-November after negotiations between Fischer, Grassley and others came up with the compromise bill. The bill would require USDA to set regional mandatory minimum cash trade for fed cattle purchased by packers for slaughter. (https://www.congress.gov/…)

Koontz said formula contracts with feeders -- alternative marketing agreements (AMAs) -- don't change the fundamentals of the cattle markets. His analysis shows AMAs are worth roughly $25 a head to feeders and another $25 a head to the packers. Legislation to require regional mandatory cash minimum trades would be disruptive to a handful of states -- Colorado, Kansas, New Mexico, Oklahoma and Texas -- where a high percentage of cattle are sold on formula AMA contracts.

"So, this legislation is really targeted at Texas and Kansas for some reason," Koontz said. He added, "Mandated cash trade is not going to get you better price discovery. It's going to put a $50 cost on calves impacted. Price discovery is not something we solve. It's something we work on."

The cash market bills came out of the high spreads between live cattle prices and boxed beef prices at the height of the pandemic. Koontz said the high volume of cattle on the market and shut down packing plants, meant packers could have brought down live cattle prices even lower than they hit in spring and summer in 2020. He said packers showed restraint in the market at that time. Live cattle in May 2020 were trading in a range of $90 to $100 per cwt before packer processing began to stabilize.

"There were plenty of animals out there," Koontz said. "It could have gotten down to 75 cents (a pound) or 65 cents."

Koontz noted there are still a lot of cattle on the market today, but prices are buoyed by high beef demand and packers running higher volumes of Saturday slaughters. He said that over the next two years, the number of fed cattle will start to be curbed due to high corn prices and drought conditions that have culled herds in Western states.

Sen. John Boozman, R-Ark., ranking member of the Senate Agriculture Committee, has his staff reaching out to academics to conduct some analysis on the Fischer-Grassley legislation. John Newton, chief economist for Boozman's staff, spoke Sunday at the meeting about agricultural-related legislation as well. Newton, a former AFBF economist, also talked about cattle markets.

Neither Boozman nor Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., have signed on to the bill.

Newton on Sunday said Boozman has asked a set of academics to conduct some analysis on the Fischer bill or impacts of requiring levels of negotiated cash trade around the country.

Newton noted the widening spread between live cattle prices and beef cutout prices that spiked in spring 2020 -- reaching a record of nearly $500 in difference between live cattle and boxed beef. The price differential has come down, but it's still more than $100 wider than it was before the pandemic.

Newton then offered an analysis about the wide differential that goes against the Biden administration's claims that the Big Four packers are responsible for the high inflation among meat products. Newton pointed to a wider share of the beef dollar going to retailers and not packers.

"The retail market's share is where a lot of the inflation has showed up, and the retail spread is getting wider," Newton said.

Newton pointed to numbers showing that, in 1970, the share of the beef dollar broke down to 64% to the farmer, 13% to the packer and 23% to the retailer. In 2020, the farmer gets 38%, the packer gets 18% and the retailer gets 44%, Newton's numbers showed.

Koontz made similar references to retailers getting a higher cut of the beef dollar as well. Local retailers, though, remain popular with their consumers, which draws less criticism and pushback than when packers are making money.

Looking at the growth of alternative marketing arrangements (AMAs) between producers and packers, Newton showed AMAs were responsible for 40% of cattle marketed in 2007, but that number has increased to 72% since then. Over roughly the same time, the percentage of beef graded as Choice by USDA also has gone up from roughly 55% to 83% now. The implication is that AMAs have raised the level of quality beef grades among producers.

Premiums to cattle producers for those Choice grades also has gone up 70% since 2010 to an average of $55 a head. All premiums since 2010 have gone from an average of $12 per head to $37 per head as well.

While Boozman and his staff are waiting for more academic reports, Newton said, nationally, cattle markets would have to change 28% from AMAs to negotiated cash trade to meet the Fischer bill requirements. States such as Nebraska and Iowa would see little change to meet the minimum cash trade, but roughly 52% of cattle marketed in the Texas-Oklahoma-New Mexico region would have to change weekly from AMAs to negotiated cash trade. Kansas cattle marketing would have to change 46%, and Colorado would have to change 48%, Newton highlighted.

Zippy Duvall, president of the American Farm Bureau Federation, told reporters on Sunday that Farm Bureau continues to work on cattle markets. Duvall said he spoke with Fischer about her bill in recent days as well.

"Right now, we think that bill is moving in the right direction," Duvall said, adding that Farm Bureau initially did not support the bill Grassley had introduced to mandate a minimum 50% level of negotiated cash trade.

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