Captive supply arrangements cover almost half of the Canadian and American beef industry.
Packer-owned feeder calves, special pricing formulas and other contractual agreements to market cattle have grown steadily in both countries, leaving many worried about what’s happening to the cash market.
A commissioned study shows captive agreements cover 40-50 percent of the available supply in Alberta, said Ted Schroeder of Kansas State University and Clem Ward of Oklahoma State University.
“There is a substantial movement away from cash market trading,” said Ward at the Alberta Beef Producers annual meeting in Calgary Dec. 4. The Alberta organization commissioned the study.
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Captive supply has doubled in the last decade but the researchers do not know if it has affected the cash market adversely.
Old research indicated a negative relationship, but the magnitude was small at five to 40 cents per hundredweight price difference, said Schroeder.
“Some feeders would tell us they believe it to be higher and it may very well be in certain locations because yards are located on the fringe where there are not many active bidders.”
However, he said much of the research is 10 years old and situations have changed.
The study found the U.S. had about eight percent of its available fed cattle in grid marketing arrangements in 1996, which climbed to 40 percent in 2001.
It’s anticipated about 45 percent will be contracted this year.
“Grid marketing in Canada hasn’t been as high but the trend is for increased grid pricing,” said Ward.
This is an arrangement where sellers attempt to fit slaughter cattle into a narrow grid of beef specifications and are rewarded for hitting the target. Sharp discounts occur the further they fall away from the specifications.
The grid price formula basis is tied to the quoted cash market or the plant average price. However, when too few cattle are traded on the cash market, the price may not truly represent market conditions, said Schroeder.
In theory, producers sell the best on grid to get the premiums on carcass attributes while the plainer cattle are sold on the cash market.
“Packers have an incentive to push the cash price as low as possible,” said Ward.
“When they do that … they are also successfully lowering that grid price. That is something to think about if you are going to use formula pricing.”
While many say they are concerned about the trend toward captive supply, there are benefits in marketing arrangements.
They can enhance vertical market co-ordination and market access for a feeder who has a known buyer receiving a specific product. Contracts can also pay premiums for quality.
Packers like agreements because it provides a reliable flow of cattle and quality control for branded programs.
When asked their opinion about the threat of these agreements, 87 percent of Canadians and 69 percent of Americans agreed reduced trading in the cash market is harmful to the beef industry.
However, half of those surveyed said marketing contracts should not be disbanded.
When asked if packers should be allowed to own cattle in feedlots, about two-thirds of Americans and more than half of Canadians interviewed said they should not be permitted.
