CALF_News_August_September_2021

6 CALF News • August | September 2021 • www.calfnews.net Continued on page 11  By Burt Rutherford Contributing Editor D oes the cash market for fed cattle have any relevance in a market that has clearly moved past selling cattle on the average? Short answer: yes. Many alternative marketing arrangements (AMAs) use cash price as the base point, so having a viable cash price is essential. The real question, then, is the weekly cash price as it’s currently derived repre- sentative of the fed cattle market? Short answer: not really. The four major packers account for around 85 percent of the fed cattle trade. Depending on the region, the portion the cash trade represents can be very thin to nonexistent. “Are we better served with four pack- ers with very similar business models or would we have more transparency from tens of thousands of transactions between the host of end users – HRI, retail and beef exports?” asks Don Close, senior analyst-animal protein with Rabo AgriFinance. Given all the angst, arm waving, gnash- ing of teeth and infighting over perceived problems in the cattle and beef marketing chain, Close took a look at the wholesale market and asked himself if there was a way to take those tens of thousands of individual transactions and work back to determine a live price equivalent. Short answer: yes there is. Just as there’s a range of cash prices today, there’s a range of the percentage the live animal is to the cutout.“So if we have that ratio of live to cutout and drop, whatever it is for that week, you can take the cutout price times that percentage and get a live price equivalent,” Close says. “What I’m talking about here is transferring negotiation on the live animal price to negotiating the ratio of live to cutout and the drop. So, if we have the simplicity of that transaction to get a live equivalent, then those price rela- tionships between the fed steer, a feeder steer and a calf are all still in place.” Close’s analy- sis shows the long-term average of the ratio of aggregated steer and heifer values to the combined value of comprehensive cutout values and drop credits is 53.23 percent. That percentage is the multiplier to determine the cash equivalent price. Since cutout values are dynamic, being established with every transaction in the wholesale beef market, that percentage will vary week to week, depending on availability of fed cattle, seasonality of cutout values and timing within the cattle cycle, Close notes. The analysis excluded negotiated net grid live sales because there were too many voids of trade volume to have a reliable price series, Close says. While forward contract sales are categorized as a formula transaction, they were not included because they are a different type of transaction for a future delivery that isn’t determined by week-to-week prices. “For all the dressed transaction types, we matched the live FOB weights with the carcass weights of dressed transac- tions to get an estimated hot carcass yield in order to convert carcass transactions to a live price equivalent,” Close says. “For live and dressed FOB and delivered sales, a weighted average was made to avoid price distortion for freight allocations between FOB and delivered sales of the same transaction type.” Establish a Base Price The cutout-derived live price equiva- lent establishes a base price. “The buyer and seller still have to negotiate over cattle quality, cattle condition, weighing conditions, the yield history of the individual plant and the freight differential between the feedyard and the plant,” he says. To that end, AMAs and the various value-added programs wouldn’t change. They would simply use a more accurate and transparent base price to negotiate premiums and discounts. One thing that would change, he says, is the historical basis. The live cattle futures contract, in and of itself, would still remain, but it would affect historical basis. “If we start with a cutout price and work it back to a live animal price, then the relation with futures is consistent. And the ability to determine basis levels, that stays the same,” he says. “The one thing it will change is it would disrupt historical basis levels.” That’s because cutout prices are driven by the seasonality of cutout values. Thus, a new basis value would be established. Given that, it would take some time to establish enough historical price points to establish new historical basis. Another impact of establishing a live cattle price from cutout prices is the violent price swings, brought on by things like packing plant fires, pandemics and gyrations in the cattle cycle like we saw in 2014-15, would flatten. “During periods of exceptionally tight cattle supplies, when packer margins are Has the Time Come to Rethink Fed Cattle Cash Marketing? COVER STORY Would moving to the wholesale beef market provide a more accurate and transparent cash price equivalent? Let the conversation begin.