RED DEER – Packer ownership of cattle is growing in Canada and the United States, yet fears that this contract situation could hurt cash prices appear unfounded.
Research from an American firm showed prices from negotiated cash deals and captive supply contracts were so closely linked that the two were almost indistinguishable. Many formula pricing agreements are based on the last week’s cash market, so prices remain close.
“One of the allegations was that packers made special sweetheart deals with the larger feedlots so the marketing agreements were higher than what they were paying for negotiated trade,” said Clement Ward, a U.S. consultant. He was contracted by the Alberta Cattle Feeders Association to research the question and presented his findings at the annual beef industry council convention in Red Deer Feb. 17.
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A negative relationship was found between fed cattle prices and the volume of captive supplies. However, the price difference was small at five to 35 cents a hundredweight.
During down-market periods, formulas tend to be slightly higher, but in an up market, cash leads over the formula.
“If you thought there were large differences, this does not show that,” he said.
Ward’s research gleaned from mandatory price reporting and surveys among producers showed contracts, grids and other agreements have grown over time.
From 2002-03, more packers in Canada were feeding their own cattle while the U.S. had more contract agreements. Packer ownership in the U.S. usually runs below 10 percent but other marketing agreements were set for about 45 percent of the available cattle between 2001-04.
Producer-owned facilities might yield better prices. The U.S. Premium Beef co-operative formed in 1997 provided a way for feeders to create their own captive supplies with increased premiums among member owners.
The average producer got $15-$20 US per cwt. more selling to the co-op than the open market. Producers offering better cattle might receive $45-$60 over average cash market prices.
However, when questioned, U.S. producers did not seem to want more co-operatives to gain better prices.
Overlapping motives were reported for moving toward grid pricing.
The American producers said agreements gave them carcass premiums, access to carcass data and overall higher prices.
Canadians were asked what might encourage them to do more grid pricing. They said these agreements might yield higher prices, premiums for better carcasses and increased competition among packers.
Canadians were less apt to call for a limit on contracting between packers and feeders.
While they wanted more co-operatives, they did not feel the current packer operations should be broken into smaller companies.
Their U.S. counterparts think restraints should be put on contracts between packers and feedlots.
When it comes to price discovery, the feeders on both sides agree declining cash market trades are harmful to the industry.
Opinion was mixed between U.S. and Canadian feeders whether negotiated cash prices are preferred to formula prices, and whether formula prices should be tied to boxed beef or retail prices.
Canadians believe formula trades should be tied to the boxed beef market whereas the U.S. feeders were split on this.
Prices paid to Canadians tend to be tied to plant costs.
When asked whether packers should be allowed to own or feed cattle, 60 percent of Canadians said there should to be a limit. U.S. opinion was split on this matter.
Regulatory agencies in the U.S. have not halted the trend toward more captive supplies and potentially reduced competition. Increased levels of captive supply have been gradual and have not triggered anti-trust or anti-competition investigation.
Overall, Ward found the captive supply issue is contentious in both countries but the solution is elusive and he does not expect changes soon.
