Trade-Offs in Price Discovery

Hearings in the U.S. House and Senate on price discovery in U.S. cattle markets symbolize the continued attention being paid to the issue. Further evidence comes from the release of a report entitled Fed Cattle Price Discovery and Considerations. The report, the work of seven agricultural economists from several land grant universities, seeks to provide guidance on the economic forces shaping the cattle industry and the implications of policies proposed to change industry behavior or structure. It was commissioned by the National Cattlemen’s Beef Association.

The report is extensive and contains background information on price discovery and cattle markets and recommendations on how to improve price discovery. A few snippets from the report include:

• Improved price discovery may improve knowledge of market conditions for sellers and buyers but will not, by itself, change overall market price levels. Current price levels are largely related to the balance of supply and demand in the industry.
• Any mandatory or voluntary intervention in cattle markets will result in higher costs to the entire industry. Trade-offs exist between better price discovery and the costs of better price discovery. Higher costs would be borne by all market participants including cow-calf producers.
• Efforts to increase the volume of negotiated transactions in the fed cattle market are well-founded and worth supporting. The most promising route to this goal is through voluntary industry initiatives.
• A small number of transactions can lead to effective price discovery. The industry should consider voluntary initiatives to define targets for negotiated transactions on a regional and perhaps seasonal basis of 5 percent to 10 percent of all transactions.
• Improvements in price reporting like revised confidentiality restrictions, more detailed reporting on formula transactions, and the reporting of yield data can contribute to significant improvements in price discovery.
• Market power in fed cattle markets has small negative impacts on prices. These impacts are offset by substantially larger cost efficiencies to the benefit of cattle producers and beef consumers.

Better price discovery in cattle markets can be had and cattle markets can be improved. However, the report’s authors note, “… we recognize that making things simpler than they actually are is very dangerous. The U.S. cattle and beef industry is arguably the most complex set of markets on the planet.” Reforms should proceed with caution. Otherwise, it could make it worse for market participants. The report can be found at www.fed-cattle-price-discovery-issues-and-considerations-e-1053.pdf (okstate.edu).