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June 2015
Monthly Meat Lookout
Price discovery concerns
Price discovery is at the heart of what make markets work. That’s especially true of the
livestock and wholesale meat markets. The last 30 years have seen much hand-wringing
about “captive supply” in regard to live cattle and intermittent calls for a ban on packer
ownership of livestock. Meanwhile, the way beef is priced at the wholesale level has
changed dramatically in the past 15 years but without the same level of concern.
Captive supply includes formula-priced cattle, packer-owned cattle, cattle that are
forward-contracted and cattle sold on a pre-determined grid. These transactions now
dominate the way cattle move from sellers to buyers each week, which raises the
question of whether the beef industry should or wants to do anything about it.
The cash market for live cattle has been declining for the past ten years. 2005 was the
last year that more cattle (52.1%) sold on the national cash market than by any other
means. Formula pricing that year was 33.2% and forward contracting 4.8%. Negotiated
grid sales (which can be added to the cash market percentage) made up 9.9%. In 2014,
cash sales had fallen to 23.1%, with negotiated grid sales 4.3%, formula sales 56.8% and
forward contract sales 15.8%. Cash sales from January through April this year declined
even more to 20.5%.
Texas, which markets the second largest number of cattle after Nebraska, had only 3.0%
cash sales last year and 1.9% so far this year. So it has no price discovery. Kansas, the
third largest marketer, had 15.6% cash sales last year. Even Nebraska has more formulabased than cash sales. Only Iowa last year had more cash (57.0%) than formula sales
(20.3%). Formula pricing though has to be based at least in part on cash prices. So the
Corn Belt/northern market now determines cattle prices for the rest of the country.
Oddly, packers seem more concerned about the disappearing cash market than cattle
feeders. The latter reap economic and other benefits from selling on formula and want
to preserve those benefits. But what happens if the percentage of cash sales falls to
10%? Some point to the live hog market and see the lack of producer concern about no
cash market. This market had 3% cash sales last year versus 62% in 1994. There’s also no
cash market for broilers.
Hogs and broilers though are very different critters than live cattle. The latter still vary
considerably in carcass size and quality and come from several thousand different
sellers to packing plants. The pork and chicken sectors are highly concentrated and
integrated and produce “peas in a pod” in terms of uniformity.
What options are open to the beef industry? Forcing cattle feeders to sell a certain
percentage of cattle on the cash market isn’t one. Neither is paying them a fee to do so.
What needs to happen is for the industry to develop an alternative pricing mechanism. I
suggest creating a “Live Cattle Value Index”. The index would include: USDA’s 5-area
weekly average price; the average weekly close of the nearby live cattle futures
contract; USDA’s weekly blended Choice-Select cutout; USDA’s weekly average byproduct value. Each of these inputs would be weighted according to their value. The
industry’s top economists would do this after consulting with packers and producers.
The index would be set at 100 and adjusted weekly. The industry would then see how it
tracks each week for a year against cash prices.
Formula pricing has also become the main way beef is priced at the wholesale level.
Such pricing was insignificant until the mid-1990s. But it grew much more popular after
2000 and first exceeded spot sales on a weekly basis the week ended July 7, 2006. It did
that again once in 2007, for 27 weeks in 2008, for 36 weeks in 2009, for 50 weeks in
2010 and for 51 weeks in 2011. Formula sales thus became the norm by 2008-2009. The
week of February 18, 2011 was the last time cash exceeded formula sales. Formula sales
currently run in excess of 50% of total sales, with cash sales at 30-35%. There is also a
small number of forward contract sales.
Packers persuaded buyers to accept more formula pricing for two main reasons. Buyers
would get the supply they wanted and they would never be “off” the market, i.e., pay
too much. They also wouldn’t have to negotiate every day with packers over price. But
some wonder whether they now pay more for beef than otherwise they would because
packers can ration the amount of beef offered on the cash market to raise prices, on
which formulas are based. But neither buyers nor sellers seem inclined to revert to
more cash sales.
As for the markets this month, cash live cattle and boxed beef cutouts are set to decline,
possibly by $5 per cwt or more each. Live hog prices and the fresh pork cutout will be
steady to higher as the industry processes fewer hogs than in prior months. Beef at
retail faces the same challenge it did last month. It is much more expensive than pork or
chicken. April retail prices showed the All Fresh beef price was $2.28 per pound higher
than the pork price, with the spread 49.0% higher than in April last year. The price
differential is having two effects. Retail beef margins are being minimized and pork
margins maximized. This means few beef and more pork features.
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The June 2015 Monthly Meat Lookout was prepared by Steve Kay, editor and publisher
of Cattle Buyers Weekly.