We’ve reached the end of the third quarter in NCBA’s 75% Plan. How is negotiated trade holding up in each region? What are the prospects for the first year and implications of performance to this point?
Dates and Deadlines
9/27/2021 – Hemp Mini Field Day; Lubbock
10/12/2021 – WASDE, USDA
What We’re Reading
Natural-Gas Prices Surge, and Winter Is Still Months Away – Washington Post
Review of the 75% Plan
In July 2020, NCBA committed to the 75% Plan, designed to encourage increased negotiated trade in the fed cattle sector. Concerns surrounding price discovery, low cattle prices across the board, and the disruptions from the COVID-19 pandemic coalesced to bring NCBA to establish the measure. You can read a more detailed review of the plan and some things that contributed to its forming here.
The high points to remember about the 75% plan are
- The goal of the 75% plan is to increase frequent and transparent negotiated trade to regionally sufficient level, to achieve robust price discovery
- Robust negotiated trade volumes are defined by work form Dr. Stephen Koontz
- Trade in a given region must meet 75% of the robust negotiated volumes 10 weeks out of 13 in a given quarter
- Failure to meet the specified levels constitutes a minor trigger
- Three minor triggers constitute a major trigger
- Two major triggers in a set of four rolling quarters dictate action from NCBA to support legislative changes to fed cattle marketing
Results of Q1 and Q2
As the plan functions around performance by quarter, it is important to review the previous quarters to have a sense of where we are when we evaluate Q3.
The ‘worst’ quarter so far, in the context of the 75% Plan, was the first quarter of 2021. During that quarter two of the four NCBA regions failed to meet their thresholds (75% of the volume needed for robust negotiated trade). Winter storms made the first quarter particularly volatile. Performance picked up in the second quarter, during which every region sold the necessary number of head on a negotiated basis to avoid tripping a minor trigger.
Q1 2021 Weekly Negotiated Trade Volume (Red = Did Not Meet 75% Plan Threshold)
Q2 2021 Weekly Negotiated Trade Volume (Red = Did Not Meet 75% Plan Threshold)
The results for each quarter to this point have tracked relatively closely with forecasted negotiated trade. These forecasts were based on a seasonally adjusted index of negotiated trade, which was structurally adjusted to account for the new 75% Plan. As you can see from the chart below in TX-OK-NM the probability of failing the parameters of the 75% Plan was higher in Q1 than in Q2. This was borne out in reality; the region failed Q1 but passed Q2. However, the forecast predicted that Kansas was more likely to fail in Q2 than in Q1, though the probabilities were relatively close. This was not the reality, and in fact Kansas passed Q2 and failed Q1.
Probability of Failing 75% Volume > 3 Weeks in Quarter X, Year X, by Region
Results of Q3
Because the plan dictates that the tripping of two major triggers in four rolling quarters would constitute a need for legislative action, and because the industry tripped a major trigger in Q1, the results of Q3 and Q4 will be very important. To that point, forecasted results indicated that Q3 was the most risky quarter in the system, with the highest probability of tripping a major trigger. The chart above shows that Q3 has a greater than 50% chance of failure in both Kansas and TX-OK-NM, suggesting a greater than 50% chance of a major trigger.
This forecast did not come to pass. In fact, performance was arguably the ‘best’ it has been since the announcement of the 75% Plan. Texas only failed to meet 9,750 head in negotiated trade once, and then only by 86 head. Kansas, the second of the ‘at-risk’ regions did not fail to meet it’s negotiated trade requirements (15,750 head) a single time this quarter. In a surprise to me, Nebraska and Colorado failed to meet their requirements more weeks than any other region, but still not trip a minor trigger.
Q3 2021 Weekly Negotiated Trade Volume (Red = Did Not Meet 75% Plan Threshold)
What has changed? Why is there more negotiated trade? Prices are up from when the 75% Plan was established, but is that it? Is there an influx of cattle not destined for a quality-based grid? I would argue that the 75% Plan, to this point, has encouraged increased negotiated trade. The industry is not ‘out of the woods’; a minor trigger could still be tripped in Q4, constituting a major trigger and legislative action. In fact, the same forecast that provided the data for the bar-chart in today’s blog suggests an approximately 50% chance of overall failure. Adding to the suspense, Q4 is a relatively risky quarter; the second most risky in fact. However, a good faith effort on the part of industry members beyond the cow-calf sector to increase negotiated trade seems to be, for the moment, leading to exactly that.