24 CALF News • August | September 2020 • The State of Our Industry COVER STORY The Scales of Balance Proportional Solutions to Transitory Problems T urbulent times have prompted calls for drastic changes resulting in vast and varied disagreement in the cattle industry. Usually, we’re an industry that can stick together with the “all for one and one for all” mindset; however, it seems there’s only one thing we can agree on these days – the need for better methods of price discovery. While the majority of the industry travels down the same trail in their opinions regarding price discovery, we meet a fork in the road when discussing solutions. From cash price mandates, to negotiated grids, to alterations to the CME futures contract specifications, to cutout-based pricing, methods to better margins for our producers have been proposed, discussed and argued. The opportunity to do so arose because of the unique situation we find ourselves in enduring the consequences of two Black Swan events – a packing plant fire and a global pandemic within one year. Perhaps it’s no coincidence this discussion is re-emerging, too, because the livestock mandatory price reporting legislation is up for renewal this fall. So who’s right? Webinars hosted by associations and industry leaders have become a key tool in continuing dis- cussions and all begin with the same goal: What can we do to help our cattle producer constituents? The Iowa Cattlemen’s Association (ICA) hosted a webinar in mid-June that explored options for better price discovery and transparency. On the call with the ICA moderator were Corbitt Wall, DV Auction livestock market ana- lyst, Brad Kooima, ICA Feedlot Council member, and Jordan Levi, National Cattlemen’s Beef Association (NCBA) Cattle Market Working Group member. All panelists agreed there is an issue with the current price discovery model and addressed some of the proposed solu- tions to improving price transparency. “The biggest problem we have is that our cattle people aren’t getting a big enough percentage of the beef retail dollar,”Wall said.“We recently set an all-time record for the smallest percent- age cattle people are now getting – 14 percent – of the retail beef dollar. We’ve got to do something.” “The need to increase transparent, negotiated cash trade isn’t something that anyone of us invented,” Kooima said.“The CME has told us that. The CFTC has told us that. University scholars have told us that. The disparity between what the formula traders are getting and what the cash traders are get- ting is a huge problem, in my opinion.” “My deepest concern today,” Levi said, “is the fact that we are at or below the numbers of the 2017 Koontz study to achieve robust price discovery in mul- tiple states.” Levi was referencing a 2017 study by Stephen Koontz titled “What Volume of Cash Trade is Needed for Price Dis- covery?” His study has been referenced extensively of late as evidence mistakenly supporting the need for cash price man- dates. So much so that Koontz penned a letter to NCBA explaining that, while his research examines the impact of declining negotiated cash trade on price discovery and proposes needed volumes of cash trade for adequate price discov- ery, his work does not support any type of mandated cash trade. “The main issue I have with the policy proposal is that it would cost the cattle and beef industry millions and possi- bly billions of dollars per year,” Koontz said in his letter.“This is known from research in which I participated.” Levi supports exploring options that would improve price transparency.“Part of the disparity that Corbitt explains shows us that the 14 percent number is merely a function of bottleneck econom- ics,” Levi said. “While leverage is important, my focus has always been on bringing price discovery and price transparency to light and ways to improve that.” One notable proposed price dis- covery solution currently on the table would involve government intervention with a bill introduced by Sen. Chuck Grassley (R-Iowa) and Sen. John Tester (D-Mont.) requiring a minimum of 50 percent of a meat packer’s volume of beef slaughter be purchased on the cash market and delivered within 14 days (aka the 50/14 proposal). Currently there is not a minimum requirement for cash trade and the delivery requirement is 30 days. Some state cattle associations have passed policy in favor of the 50/14 By Olivia Willrett Contributing Editor LF e s • August | Septe ber 2020 • .calfne