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Ideas for Bolstering the Cash Market: Part 2

Possible Fixes Needing Discussion from the Whole Beef Production Chain

This is Part II of a compendium of possible approaches for cash market improvements. Stephen Koontz, an economics professor at Colorado State University, has been involved with analyzing data from the Mandatory Price Reporting information, the USDA RTI study, and interviews with cattlemen and packers that reveal the difficulties with cash marketing. This is edited and condensed from a 15-page set of possible prescriptions from Koontz.

5) Standard Business Practices – The agreements on institutional practices covered above are voluntary agreements between packers and feeders. Another step with more teeth in it would be to actually create an entity to formalize and enforce standard business practices to firm up cash sales transaction and trade reporting rules. Koontz suggested that housing and staffing such an entity could be a natural function of the national cattle industry’s organization, NCBA.

He noted the grain trade has such an entity, a committee of the National Grain and Feed Assn. and association membership constitutes acceptance of the rules they set. There are sets of rules for the grain trade, feed trade, barge trade, barge freight, and rail freight. Payment, freight, quality, and delivery timing rules are spelled out without dictating terms of trade or creating leverage for any party.

Again both buyers and sellers of fed cattle would have to be involved and the rules would be voted on by the committee. Koontz said many interviewed cattle feeders, especially ones using the cash markets a lot, had indicated that something like this is needed.

6) New Marketing Information – Two items of risk that keep cash market participation down are the risk for feeders, of not getting the showlist sold in a given week, and for packers, not getting sufficient volume bought in a given week.

More information than what it is the Cattle-on-Feed report could solve problems for both feeders and packers. What is needed, is knowledge of anticipated marketings and purchase needs by region. Koontz suggests aggregating overall cattle feeding enterprises expected marketings for the upcoming 8-12 weeks within a region. Packers would provide expected cattle buys for the next 8-12 weeks for each region. Imbalances between supply and demand could thus be obvious for everyone and moves to avoid bad spots could be made. AMAs already provide some of this information to both feeders and packers, so schedules and efficiencies happen better.

It would seem that this is information everyone is going to find out anyway -- just too late to avoid the problems.

Koontz points out that this information is what the industry already tries to estimate anyway.

7) Market Makers -- A tool already used by all the major stock exchanges, a market maker’s 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 trading in the cash market. Market makers are compensated, either directly, through commissions, or through buy/sell market opportunities. The cash market would gain some thickness and stability and would benefit from more certain price discovery. Funding could come from the industry or, perhaps, from a government source as contributing to the public good of preserving a cash market.

8) Permits or Certificates – This system would require all cattle feeding operations over a certain size to obtain permits to trade a specified percent of the total fed cattle in the cash market. Operations that exclusively market through AMAs could transfer their permits to other operations that make extensive use of the cash market. The transfers could be worth fifty cents or a dollar or whatever the industry decides is fair compensation to get a cash market and the cash market feeders would get the transfer fee.

As an example, Koontz explained that if 90 percent of the cattle traded through AMAs, at a 50 cent/hd. transfer fee, the 10 percent cash market traders would get $4.50/head for supporting and using the cash market. If the AMA feeders feel the cash market is getting too thin, they could pay $2.00 for each transfer, and cash market feeders would get $18/head.

This would involve a mandate regulated by the industry but it directly supports getting a cash market more reflective of value for the purpose of price discovery.

9) Legislation – Legislative ideas in the past have tended to take away the advantages AMAs have for cost reduction, efficiency enhancement, and demand improvement through better quality. It does take away cattlemen’s freedom to operate and innovate and revising mandates are difficult to do. What percentage of cash trade would be required is an estimate at this point and could vary by region.

From our vantage point, the tools that have taken retail beef quality, i.e. tenderness, flavor, predictability, and palatability far beyond the days of commodity beef, selling on the average, would be significantly impaired. The cash market could be bolstered but only temporarily, as the consistency and predictability of a significant portion of the beef supply would no longer have those qualities, unless retailers and restaurateurs stepped in to remedy and differentiate, which would devalue some of the cattle again.

There are many cattlemen who believe improving the reliability of the cash markets to accomplish price discovery is needed. This list of prescriptions by an experienced economist who is familiar with the cattle industry has pored over the data from the MPR reports, the RTI study, and those interviews and knows how markets in other commodities and assets work is a starting point the industry should not ignore. Cash markets at this time -- for good or ill -- are the basis for negotiated trade, AMAs of many types, and market indicators for all the subsequent sectors of the market beyond packing and processing

Frustration among cattlemen has built to the point that they are considering options unthinkable in the past. It is time to take the proverbial bull by the horns. This problem is not easy but it is much more familiar territory than, for example, the economic shutdown we are forced to deal with now.

Shouldn't we get to it?

Click here to find the USDA-RTI Study:

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