An index tracking boxed beef prices launched by the Chicago Mercantile Exchange (CME) appears to have largely flown under the radar. The Boxed Beef Index, launched a year ago, joined similar indexes on the CME for Feeder Cattle, Lean Hogs, Pork Cutout, and Fresh Bacon. The index is a five-business day, volume-weighted index of daily choice and select cutout prices based on data collected and published by the USDA. At the time of its introduction, the CME Group said the index “will provide market participants with price discovery across the entire supply chain” and provide a transparent daily price to track and forecast beef prices and potentially become the benchmark price for beef.
The Boxed Beef Index is not a tradeable product, but someday it could be. The Pork Cutout Index was launched in 2015 and ultimately resulted in the launch of tradeable pork cutout contracts in 2020. The Pork Cutout Index is also being used to set the base price for market hogs in alternative marketing arrangements (AMAs) or formula contracts. It’s conceivable the Beef Cutout Index could do so in contracts for fed cattle as well. Presently, formula contracts for cattle mostly use an average negotiated price as a base or reference price.
The lack of price transmission through the supply chain from wholesale beef to cattle continues to be a concern in the cattle industry. Using the Boxed Beef Index as a reference price in contracts might help bridge the gap between wholesale beef prices and cattle prices.
Lee Schulz, an Iowa State University extension livestock economist, says while that’s true, using the Boxed Beef Index as a reference price in contracts has limitations. First, the index is based on only a percentage of all beef traded and may not truly represent an animal’s wholesale value. Second, the index doesn’t include a drop value which adds to the animal’s value and must be considered. And finally, the variability in the spread between live and boxed beef prices could be troublesome for producers who market infrequently. Since 2017, the spread has varied from as low as $68 per cwt. to exceeding $350 per cwt.
Schulz says the use of the Boxed Beef Index as a reference price in AMAs may or may not result in higher prices for cattle relative to other pricing mechanisms. Still, it might provide a better link between boxed beef and cattle price. Thus, the index could be worthy of investigation as an alternative for producers using AMAs when marketing fed cattle.
Figure 2. Boxed Beef Cutout Value