Price Discovery in Cattle Markets
Fed cattle are typically marketed through one of four types of transactions: negotiated or cash sales; alternative marketing arrangements or formulas; negotiated grid; and forward contracts. The mix of these types of transactions varies by regions, but over the years the trend has been towards more cattle marketed through formulas and fewer marketed through negotiated transactions. For Nebraska, formula sales have averaged between 50-60 percent of total transactions while negotiated sales generally ranged between 20-30 percent (Figure 3). Fewer cash sales means a thinner market and growing concerns with price discovery.
S. 4030, the Cattle Price Discovery and Transparency Act, introduced in the U.S. Senate by Senators Deb Fischer (NE) and Chuck Grassley (IA) and cosponsored by several other senators, seeks to address the price discovery concerns. The legislation would make several changes to the reporting requirements under the Livestock Mandatory Reporting Act (LMR) in order to improve information gathered through price reporting. It would also require the USDA to create and maintain a library of marketing contracts between packers and producers.
But perhaps the most talked about provision in S. 4030 is the mandatory minimum requirement for negotiated transactions. Under the Act, packers who control over 5 percent of the daily kill (the largest 4 packers) would be required to purchase a minimum percentage of cattle through approved pricing mechanisms on a plant-by-plant basis. Approved pricing mechanisms include negotiated purchases, negotiated grid purchases, purchases through stockyards, and purchases through a trading system or platform. The minimum thresholds would apply regionally, with the USDA establishing 5-7 regions for purposes of enforcement. Packers may be assessed a penalty by the USDA of $90,000 for each violation of the thresholds. Minimum thresholds during the first 2 years under the act would be based on the average percentage of negotiated and negotiated grid purchases between January 1, 2020, and January 2, 2022. After this initial period, the thresholds would be set by USDA subject to rule making and cost-benefit analysis.
Nebraska is presently its own region for purposes of reporting under the LMR. Whether that would continue with S. 4030 is unknown. If it were, a mandatory minimum could affect facilities in the state owned by Cargill, Tyson, and JBS. The initial mandatory minimum for Nebraska transactions during the first 2 years would likely fall between 40-45 percent of total transactions. For context, in the first quarter of 2022, negotiated and negotiated grid transactions accounted for 32 percent of total transactions on average. But, for the week ending April 10, it appears cash and negotiated grid sales comprised 43 percent of total transactions. It would appear, then, at least some of the time, packers and feeders in Nebraska would need to change their behavior from what they otherwise would do and engage in more negotiated transactions or packers would be subject to penalty.
The hearing on S. 4030 before the Senate Agriculture Committee is scheduled for April 26. The committee will then consider markup and advancement to the full Senate. Nearly everyone agrees negotiated transactions are important for price discovery in cattle markets. The bill presents an alternative for achieving the goal.
Figure 3. Nebraska Fed Cattle Transactions, 2017-2022