New cattle market reports debut but analysts say transparency is still lacking
The USDA Agriculture Marketing Service introduced two new reports, both designed to offer transparency to cattle markets, attempting to deliver on the Biden Administration’s executive order on promoting competition.
The first new report, the National Daily Direct Formula Base Cattle, which was issued on Monday, Aug. 9, will provide greater information into the foundational prices used in cattle market formulas, grids and contracts. The second report, the National Weekly Cattle Net Price Distribution, was issued Tuesday, Aug, 10, will show the volume of cattle purchased at each different level of pricing within those formulas, grids, and contracts. According to an announcement from the USDA, the National Daily Direct Formula Base Cattle reports will enable stakeholders to see the correlation between the negotiated trade and reported formula base prices, as well as the aggregated values being paid as premiums and discounts. Daily formula base price reports will be national in scope and released in morning, summary and afternoon versions. The weekly and monthly formula base reports will be both national and regional in scope and include forward contract base purchase information.
The National Weekly Cattle Net Price Distribution report will show at what levels (price and volume) trade occurred across the weekly weighted average price for each purchase type – negotiated, negotiated grid, formula and forward contract. Currently, the market speculates whether large or small volumes of cattle trade on both sides of the price spread. With premiums and discounts applied to the prices, the spreads shown on reports can be wide. Publishing a price distribution for all cattle net prices will offer more transparency to each of the purchase type categories. This report is a window into what producers are paid for cattle (net) and retains confidentiality by segregating volumes purchased in $2 increments +/- the daily weighted average price depending upon premiums and discounts. AMS has published a similar net price distribution report for direct hogs since January 2010.
Livestock Mandatory Reporting market reports are issued for slaughter cattle, swine, sheep, boxed beef, lamb, and wholesale pork and provide information on price trends, supply and demand conditions, and the various purchase and sales methods used in the industry. Some proprietary transactions are protected through confidentiality.
According to the USDA’s AMS, federally inspected packing plants that annually process an average of 125,000 head of cattle are required to report information to AMS. LMR cattle reports are based on two data sets provided by packers that meet reporting thresholds – purchase data and actual net slaughter price data. Purchase data represents cattle purchased on a negotiated basis or “spot market” during a specified time period. Data includes actual prices with all other data based on estimates. Slaughter data represents cattle that have been harvested during a specified time period. Data includes net prices, actual weights, dressing percentages, percent Choice and price ranges. Weekly reports start Monday afternoon and end the next Monday morning. Currently, 34 plants report cattle information under LMR, accounting for 92 percent of cattle purchases in the United States. Market Reporters review between 5,000-8,000 cattle data records on a daily basis. These data are used to publish 24 daily and 20 weekly cattle reports.
Kyle Bumsted, a Nebraska-based market analyst said based on the first afternoon report, National Daily Direct Slaughter Cattle – Formulated Base Purchases, in the live steers FOB category, 80% of the 306 head sold will grade Choice or better with a dressing percentage of 63.5%. The cattle ranged from 1,373 to 1,559 pounds with an average of 1,433, bringing $119.85 to $125.09 cwt. with an average net price of 121.93 cwt. This price, the quality of the animal, the anticipated dressing percentage, the weight, and the average of the previous week is used to determine the formula base price.
Bumsted said it would add to the transparency if more information were available with regard to the quality of the cattle, but the report delivers little to the industry.
“It does little for the industry,” he said. “What would be more transparent would be knowing how many head of cattle or hogs or head of livestock are actually owned by the that packer, even though they say they don’t own livestock, there’s still some of that out there.”
The uncertainty surrounding the details of contracts, many of which are likely outdated, can take players out of the game and cause producers to shy away from the market.
“When you lose that liquidity, you lose the players,” he said. “That’s never a good thing when you lose people participating in the market.”
Travis Hickey, the founding broker of Cattlenomics, said any report is just a piece of data that gives a portion of a picture, saying the new reports alone can add to transparency, but don’t represent every piece of the complicated market.
There’s pieces of this data already available on other reports so I don’t think there’s data in here that we didn’t have some kind of access to prior,” Hickey said. “From a market information and analysis standpoint, having this report does help market participants see the formula base by sex and by procurement type is beneficial.”
Hickey said live FOB, live delivered, dressed delivered, and dressed FOBs are the four main procurement types in the reports. The live base formulas are animals priced on their live weight, not a carcass weight. The difference, he said, between FOB and delivered is whether the price is established at the source or at the destination, with FOB being at the source. With only a week of data, he said it appears the dressed FOB is the packer’s preferred method of procurement though it may not always be the case historically.
For a cattle producer seeking transparency, Hickey said the reports can shed light on the range of prices paid to producers and what the market is.
“Even though it can be difficult to track down the actual report, the data is available to everyone if they want to find it,” he said.
He said the market has long struggled with transparency, but market participants do all have access to the reports, although navigating and understanding them can be a challenge. These reports, he said, quantify what cattle feeders that sell on a formula receive for their animals, and how the base price is determined. It is more difficult to determine packer margins, though estimates can certainly be drawn based on wholesale beef prices but fluctuation in other input and labor costs makes an exact figure difficult to prepare.
Every industry has its own terminology, and the cattle markets are no exception. The base price is the price paid for livestock, delivered at the packing plant, before application of any premiums or discounts, expressed in dollars per hundred pounds of hot carcass weight. The net price is the price after application of any premiums or discounts, expressed in dollars per hundred pounds. Discounts are subtracted from the base price due to weight, quality characteristics, yield characteristics, livestock class, dark cutting, breed, dressing percentage or other characteristics. Alternately, premiums are added to the base price due to weight, quality characteristics, yield characteristics, livestock class and breed. Free on board or FOB, regardless of the mode of transportation, at the point of direct shipment by the seller to the buyer or from a common basis point to the buyer. In the reports, prices for cattle include the price per hundredweight; the purchase type; the quantity on a live and a dressed weight basis; the estimated live weight range; the average live weight; the estimated percentage of cattle of a USDA quality grade Choice or better; beef carcass classification; any premiums or discounts associated with weight, quality grade, yield grade or type of purchase; cattle state of origin; estimated cattle dressing percentage; and price basis as FOB feedlot or delivered at the plant.
There are a number of purchase types recognized in the reports. Negotiated purchase or spot market purchase, is where the price is determined through buyer and seller interaction and the cattle are scheduled to be delivered to the plant within 30 days of the agreement. The packer reports these purchases as scheduled for delivery in either 0-14 days or 15-30 days. Forward contract purchase is an agreement for the purchase of cattle, executed in advance of slaughter, where the base price is established by reference to prices quoted on the Chicago Mercantile Exchange. The CME is the negotiated grid purchase where the base price is negotiated between buyer and seller and is known at the time the agreement is made, and delivery is usually expected within 14 days. However, the final net price is determined by applying a series of premiums and discounts based on carcass performance after slaughter. The base price is submitted when established. The net price is submitted after slaughter and carcass grading has occurred. Formula purchase is the advance commitment of cattle for slaughter by any means other than negotiated, negotiated grid or forward contract. Formulas use a pricing mechanism where the price is often not known until a future date.
Packer-owned information represents cattle that a packer has owned for at least 14 days immediately before slaughter. For any calendar year, the term “packer” includes only a federally inspected cattle processing plant that slaughtered an average of 125,000 head of cattle per year during the immediately preceding five calendar years. Additionally, in the case of a cattle processing plant that did not slaughter cattle during the immediately preceding five calendar years, it shall be considered a packer if the secretary determines the processing plant should be considered a packer under this subpart after considering its capacity.
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