NASHVILLE, Tenn. — Only about a quarter of U.S. fed cattle are sold on the cash market, resulting in a lack of price discovery and extreme market volatility.
“In 2015 we had the smallest number of cattle trading in the cash market,” said Randy Blach, chief executive officer of Cattlefax.
About 22 percent of cattle traded in the cash market in 2015. That improved slightly to 26 percent last year, but that was still low, he said at the National Cattlemen’s Beef Association convention in Nashville Feb. 1-4.
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The cash market has been replaced with other options such as contracts, grids or branded program agreements, but information from cash trade is needed to set value and have a functioning futures market.
“Price discovery is not free,” Blach said.“We will have to make some investment in price discovery in our industry if we are going to continue to have a viable pricing mechanism.”
As well, the markets have been wild, moving down 41 to 45 percent during the course of last year.
The markets have had a range of about 20 percent for highs and lows across the year since the 1970s.
“Is this the new normal?” he asked. “Are we going to have to adapt to more volatility as we look down the road.”
The NCBA has been meeting with the CME Group that owns the Chicago Merchantile Exchange to make cattle future contracts more responsive to current conditions so that producers have better price discovery and can better manage risk, said NCBA president-elect Craig Uden.
“Other commodity groups have the same price discovery problems, the same delivery problems,” he said.
The CME has made several changes to reduce volatility.
Cattle industry representatives have also met with the Commodity Futures Trading Commission.
“We don’t have a broken contract. What I see is a contract that needs to be fixed,” said Ed Grieman of the Live Cattle Marketing Council.
“We are asking the CFTC not to fix anything but take a look at the contract and take a look at the volatility and help everybody understand how electronic marketing is changing everything that we have,” Grieman said.
The beef sector needs to adjust to new marketing realities, but everyone needs to know what cattle are worth to make better decisions, said Grieman.
“The key is (that) what happens in the fed cattle market trickles down hill,” he said.
“If we don’t have a robust fed cattle market and exchange and futures market, it is going to affect our industry.”
The Fed Cattle Exchange, which was established last year, attempts to address some of the information gaps.
Managed by Superior Livestock Auction, the exchange is a weekly live online auction offering fed cattle for cash.
The U.S. Department of Agriculture sanctions it, and transactions are posted with the mandatory price reporting system.
The exchange offers more information on the type of cattle being offered, and participation is growing, said Jordan Levi of Superior Auction.
The information seems to be helping with price transparency and factors affecting the market.
“You need to provide input for traders other than weights or the Choice-Select spread,” Levi said.
“You need to show traders what the cash market is doing.”
It costs $1 per head to consign to the auction. Since it started 135,000 head have sold. Of the 720 lots offered to date, 528 lots sold.
There are about 800 viewers each week. Seventy percent of the top 10 feeders and five to six packers are participating weekly.
Only packers are allowed to buy, and delivery dates are negotiated. Settlement is between the buyer and seller.
To view the exchange, visit www.fedcattleexchange.com.
