A new method of voluntary price reporting is now available in Canada.
Canfax has collected information on cattle contracts between feedlots and packers for the last month. It is confidential and released only to the feedlots that report to Canfax.
Canfax’s market information was based on cash trade reports for more than 40 years, but trends in the last four years showed a sharp decrease in the cash market, said senior analyst Brian Perillat.
“We have seen so much of the feeding sector and packing plants do fixed basis contracts to one another,” he said at the annual Canfax forum in Calgary Nov. 19.
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Less information available in Canada and the United States made price discovery difficult. Cash settlements are used for government statistics, market analysis and insurance programs.
They are also used for negotiating base prices in a formula grid, in which cattle are either bought for delivery later or contracted to fit a certain list of specifications. A base price is negotiated and premiums or discounts are applied when the cattle are delivered to the buyer.
A contract is a good way to manage risk as the market continues to be unpredictable. However, the record high cash prices paid this year may have been higher than some contract payments.
“In the last two years, the guys who had contracts did substantially better than the guys on the cash market,” Perillat said.
The U.S. cash market has almost disappeared and the industry is getting concerned, said Stephen Koontz of Colorado State University’s de-partment of agricultural and re-source economics.
He is conducting a study on price discovery for the National Cattlemen’s Beef Association.
Formula marketing comprises 60 percent of trade volume in the U.S. fed cattle market.
“There is no price discovery happening. We are using prices that are discovered somewhere else,” Koontz said.
Prices may be based on the plant average or a U.S. Department of Agriculture regional price.
The U.S. has a mandatory price reporting process, but it does not offer timely information. The livestock industry lobbied hard to get this scheme in place, but it has limited value.
“Mandatory price reporting tells us what happened. It does not show what is happening,” Koontz said.
His analysis of the major beef producing regions shows Nebraska is among the few areas where cash bidding remains strong. Thirty to 40 percent of the marketings are negotiated cash trades. In other places, the ask and bid system is five to 10 percent of the market.
Texas, New Mexico and Oklahoma have the most cattle in the country, and 90 percent are sold through formula arrangements.
“The overwhelming concern in this market is what is going on in Texas with the evaporation of cash trade. There is really very little cash trade going on in the southern Plains,” he said.
The situation is similar in the U.S. hogs market. Less than 10 percent of hogs sell for cash. As few as two percent are sold for cash some weeks.
“Those negotiated prices provide the backbone of what is traded through these formula arrangements,” Koontz said.
“They are usually tied back to some sort of lean pork price.”
There are good reasons to negotiate contracts, especially for large feedlots.
Feedlots and packers know when cattle are ready for market, and they are sold at the optimum weight. This is much better than holding them back and chasing the markets week by week, hoping to earn an extra few cents a pound.
Koontz said one of the most expensive employees in a feedlot is the person figuring out how to sell the cattle at a profit. Handling bids takes time, which could be better spent sourcing the most profitable cattle.
Contracts provide packers with predictable volumes and lower costs.
In addition, large stockyards are becoming too expensive to run. They are in danger of becoming redundant as more cattle are sold by contract.
Nevertheless, the industry still wants cash information to calculate the basis for formula transactions and obtain information to use when building forward contracts.
The catch is, people want the information but they do not want to participate in it or pay for data.
“We all want the information that comes from the markets, but we also want the option not to use them.”
As well, large volumes are needed to give negotiators a good sense of market trends. A limited amount of information results in errors.
barbara.duckworth@producer.com
