Cattle Contract Library pilot program overview
The Cattle Contract Library pilot program is live with reporting from packers. Packers are required to submit active contract and volume information to USDA’s Agricultural Marketing Service while still maintaining confidentiality. In order to ensure that privacy, not all of the information with regard to each contract is available and totals will not total 100%.
Weekly information is published on Monday on the program dashboard. This week, 181 active contracts have been reported, with 228 base price options. About 75% of the base price options are based on a USDA report, 10% on Chicago Mercantile Exchange, 9% on a negotiated basis (a negotiated grid price) and 4% top of the market.
According to a USDA AMS webinar Wednesday morning, of this week’s contracts, 75% include a base price adjustment. Of those, 91% of base price options had premiums or discounts applied. In the base price selling basis portion of the report, about 30% of the week’s contracts were on dressed or hot carcass weight or HCW basis with the packer paying the freight from the feeder to the plant. Live FOB (free on-board point of origin means the cattle are sold at the farm or feeder and the buyer pays the freight from that location) contributes about 6% of contracts, while live converted FOB is about 46%. Live converted selling basis is a live price converted back to a dress price for that transaction. Of the live converted basis, the yield conversion is 63.38.
In the base price information chart, the base price is broken down into negotiated, top of market and USDA report-based source and whether or not discounts or premiums are applied. To ensure confidentiality, this portion of the library is a base price average, which this week is $1.23.
The USDA report utilization section of the library gives the breakdown of contracts that utilize USDA reports or top of the market, which together total about 80% of the contracts in the library. Of the 80%, the breakdown of contracts specifying a USDA report are detailed by which USDA report the contract utilizes. This week, 5% specified the 5 Area Weekly Weighted Average Direct Slaughter Cattle report; 23% specified the Texas-Oklahoma Weekly Direct Slaughter Cattle — Negotiated Purchases; 35% specified Kansas Weekly Direct Slaughter Cattle — Negotiated Purchases; 33% specify the Nebraska Weekly Direct Slaughter Cattle — Negotiated Purchases; and 1% specify the Iowa/Minnesota Weekly Weighted Average Cattle Report — Negotiated Purchases.
In the cattle specs and premiums/discounts portion of the report, about 88% of the contracts in the library include a quality spec, followed by weight, age over 30 months, and yield grade all listed in over 50% of contracts. The premium and discount portion can be displayed either on a per head or a hundredweight (cwt.) basis and averages are shown as an average and a 25th and 75th percentile.
The last page of the library is the volume summary, and that portion will be populated once a full month of data is reported by the packer and will appear next week.
TRADE GROUPS WEIGH IN
U.S. Cattlemen’s Association President Justin Tupper and R-CALF USA Director Eric Nelson, Moville, Iowa, both agree that there are some good aspects to the program, and also the potential for improvement.
The fact that some packers are not required to disclose contracts due to confidentiality is a concern to both groups.
“One thing we really want to make sure we can find out is the price that some of these big corporate feedyards are getting for their cattle,” said Tupper, the manager of St. Onge Livestock, St. Onge, S.D. He said that if a contract is unique, it is considered confidential and is therefore not required to be disclosed.
Nelson is also concerned about the confidentiality cover for some of the big packers.
“The ones that are being withheld are the ones we need to see,” said Nelson, a cattle feeder and cow-calf producer. “I believe they are coming from the biggest of the big.” R-CALF USA has asked USDA to change the confidentiality standards so that more contracts will be included in the report.
The confidentiality clause serves as an incentive for packers to get bigger and eliminate their competition, said Nelson. If a packer is the only one reporting in a certain region, it is protected by the confidentiality clause. “As the packers get bigger and more dominant, they are granted confidentiality. It should be set up so that as you get bigger and more dominant, you work your way out of confidentiality protections,” he said. “The little ones are less likely to be causing harm to the industry.”
Nelson said the information that has been revealed thus far is not “earth shattering.” The report includes data such as the average premium paid for yield grade 1 or yield grade 2 carcasses, average discounts for imported cattle, and more.
“Anyone who has been in the business knows how a packer buyer will look at a group of cattle. This just quantifies all of the different categories that a packing company will look at — the upsides, the downsides, things that add value, and things that detract from value,” he said.
Will the contract library provide transparency or improve competition?
“We hope so,” said Tupper.
“Obviously the goal is to know when the packer is loaded up with cattle so that you can make market decisions, know when they will be in short supply. It’s hard to extrapolate now and it’s hard to know the actual value these guys (with contracts) are getting compared to the farmer feeder selling in the cash. The price difference needs to come to light. We do think we’ll get there, but it will be tough.”
“There is still work to be done. USDA admits it. The devil is in the details, and it’s going to be a moving target. The packer is going to find loopholes — they don’t want you to know what they are paying,” said Tupper. He believes the industry will have to keep watch, knowing the rules will need to be updated regularly to gain access to as much information as possible.
Nelson said one thing that needs to be quantified in the information is simply: the value of a contract compared to selling on the cash market.
One of the biggest reasons feeders enter into contracts isn’t primarily because they are hoping to get premium prices, but rather simply to be guaranteed market access, said Nelson.
“One of the biggest incentives to enter a contract is the fact that their cattle will likely be slaughtered in a reasonably effective timetable. They (packers) take contracted cattle first. As independent feeders, we always have trouble getting a slaughter date set in stone. Our cattle get pushed back. Covid was a perfect example,” he said.
“There is a value to those contracts, and it’s not quantified. It’s not really a written item,” he said.
Why doesn’t every cattle feeder seek a contract in order to gain market access?
“Then there is nobody left to set a price,” said Nelson. “That’s what happened to hogs. The cash hog price means virtually nothing. Less than 5 percent of hogs are sold that way, and economists say that is not enough to determine a fair value.”
GUARANTEED ACCESS BUT NOT PRICE
Although contracts guarantee market access, they usually don’t guarantee a price, because the prices are usually based on the “market” price that week.
“That’s the downside – by taking the contract, you’ll know you’ll be able to get rid of the cattle which is important, because overfeeding cattle costs money… but it also almost guarantees you’ll get an average price,’ he said.
“Last week, 4.2 percent of cattle in Texas and New Mexico were cash negotiated. The lose-lose is, the ones that were sold on the cash were the ones undeliverable under contracts. You sort the low-quality ones out and you have to sell them where you can sell them. It’s the ‘dregs’ that set the market for everything else. That’s how the market gets dumbed down,” said Nelson.
National Cattlemen’s Beef Association Senior Director of Government Affairs Tanner Beymer said the NCBA has been looking forward to the launch of the Cattle Contract Library pilot program. He said NCBA will review the product to determine if its current format provides value to cattle producers and will continue engaging with officials at the U.S. Department of Agriculture and providing feedback on this resource.
The cattle contract library is widely supported by industry groups and lawmakers on both sides of the aisle, and the introduction of this legislation comes after more than a year of NCBA pushing for the creation of the library.
“After more than a year of upheaval, facing everything from extreme drought to supply chain disruptions, many cattle producers have been backed against a wall. We need to act urgently to provide them with relief,” said NCBA President Jerry Bohn. “There is no single, silver bullet solution to the wide variety of needs among our diverse membership, but lawmakers can start by focusing on viable solutions that have broad-base support across the industry. The cattle contract library is one such solution, and it will help our producers command more leverage in negotiations with the packers. We appreciate the work of Congressman Johnson and Congressman Cuellar to move the ball forward on this urgent issue.”
Earlier this month, NCBA Vice President and South Dakota rancher Todd Wilkinson testified before the House Agriculture Committee and underscored the need for greater transparency in cattle markets. One of the solutions he advocated for was the creation of the cattle contract library, as well as full reauthorization of Livestock Mandatory Reporting.
NCBA has long advocated for increased transparency in the cattle and beef supply chain.
In August 2021, NCBA succeeded in pushing USDA to make more market data publicly available. The agency began publishing a new daily report on the foundational prices used in cattle market formulas, grids, and contracts, and a new weekly report on the volume of cattle purchased at each different level of pricing.
In June 2021, NCBA led a letter with the support of more than 36 state affiliate groups urging Congress to act on the reauthorization of LMR. LMR is the legislative mandate that requires large meat processors to regularly report information on their transactions, such as the price they pay for livestock and the volume of purchases.
In May 2021, NCBA met with American Farm Bureau Federation, Livestock Marketing Association, National Farmers Union, R-CALF and U.S. Cattlemen’s Association to discuss urgent concerns and the need for a cattle contract library was one of three priorities agreed upon by these disparate groups.
The introduction of the Cattle Contract Library Act follows months of NCBA engagement to ensure Members of Congress understand the most urgent needs facing cattle producers, the complex cattle market conditions influencing these outcomes, and the risks of adopting one-size-fits-all policy solutions that may hurt producers’ bottom line.