In July 2020, the National Cattleman’s Beef Association (NCBA) announced support for a voluntary framework to “increase frequent and transparent negotiated trade to regionally sufficient level” to achieve robust price discovery. A set of “triggers” evaluated on a quarterly basis form the framework. Today is the first in a two-part post on the results of Q1. What led to the voluntary framework and what is the 75% Plan?
Dates and Deadlines
4/23/2021 – Cattle on Feed
4/27/2021-4/28/2021- Hemphill County Beef Conference
4/29/2021 – Swisher County Spring Meeting (Call 806-995-3726)
What I’m Reading
Fertilizer Considerations for Cotton Should be Revised – AgriLife Today
Beef, cattle prices on the rise – AgriLife Today
Setting the Stage
On the evening of August 9th, 2019 a fire caused severe damage to Tyson’s beef processing plant in Holcomb, KS. The damage from the fire kept the plant and it’s nameplate capacity of 6,000 head per day offline for the remainder of 2019. The decreased supply of beef to the open market led to temporary spike in the price of boxed beef. At the same time the decreased demand for fed (fattened, live) cattle resulted in a temporary collapse in the price of fed cattle and feeder cattle.
Similar dynamics took over the entire market eight months later with the onset of COVID-19. As the pandemic took hold in packing plants federally inspected weekly cattle slaughter fell from 684,000 head to 438,000 head in just five weeks, a 36% decrease. In fact, federally inspected weekly cattle slaughter was 180,000 head below the five year average. Two weeks later, the boxed beef negotiated cutout value reached $459.04/cwt. Within the month before and after the record-setting boxed beef negotiated cutout value the price of fed steers and feeder steers fell to some of the lowest levels in recent memory. Three weeks before negotiated boxed beef prices peaked the price of fed steers on the southern plains dipped to $99/cwt. A brief reprieve brought fed cattle prices higher, but seven weeks after boxed beef prices peaked the price of fed steers on the southern plains fell to $94/cwt.
Some accused the packing sector of collusion. Others consider the divergent prices to be signs of, at minimum, a broken market. Economics suggest the direction of the price changes were expected, but it is difficult to argue that the optics aren’t favorable to cattlemen. USDA conducted investigations. Others called for more packing capacity. But a vocal group began to seek market overhaul as a solution.
NCBA’s Voluntary Framework to Achieve Robust Price Discovery in the Fed Cattle Market; The 75% Plan
As a result of these market disruptions, the NCBA set about seeking solutions for the cattle and beef industry. In July 2020 NCBA announced support for a voluntary framework to “increase frequent and transparent negotiated trade to regionally sufficient level” to achieve robust price discovery. The idea is that increased negotiated trade volumes improve price discovery for fed cattle. Increased negotiated trade will result in a decrease in alternative marketing arrangements (AMAs) that some feel distort price. My sense is that advocates hope that increased price discovery will result in better prices. Others hope that increased negotiated volumes will prevent price divergence like those resulting from the Tyson fire or the onset of COVID-19.
“The 75% Plan” is a voluntary framework that establishes ‘triggers’ for each of the major cattle feeding regions. There are triggers for both feeders and packers set at the regional level. We don’t have details on the packer ‘silo’ yet, but the feeder ‘silo’ of triggers is in place.
Negotiated Trade and Price Discovery
USDA recognizes two types of fed cattle trade, negotiated and non-negotiated. Negotiated fed cattle sales categories include negotiated cash and negotiated grid. Non-negotiated fed cattle sales categories include formula, grid, and contract sales. Negotiated trade is, “[a] price … determined through buyer and seller interaction [where] the cattle are scheduled to be delivered to the plant within 30 days of the agreement”. There are pros and cons to each type of sale and they vary depending on the party (buyer or seller). For a more in depth review of the types of cattle pricing mechanisms I recommend User’s Guide to USDA LMR Cattle Price Reports and Grid Pricing of Fed Cattle.
Negotiated trade is valuable in that the spot market contributes to price discovery. Price discovery is the means through which an asset’s price is set by matching buyers and sellers according to a price. There is a bid and ask which leads to price ‘discovery’. Prices are set in other ways in non-negotiated trades. It might be plant average price, a USDA AMS regional price, a futures price, or some other price. There is not a bid and ask to negotiate price. Research identified a clear and significant relationship between historical cash market volumes and the strength of price discovery in each USDA‐AMS regional market.
Dr. Stephen Koontz of Colorado State University published material on the minimum negotiated volumes necessary in a given region to establish price discovery. He also published the volumes needed to establish ‘robust’ price discovery in a region. Robustness, statistically speaking, means that regional negotiated prices are largely unaffected by outliers or small departures in data. These volumes are the basis of the 75% rule.
Robust Volume of Negotiated Trade and NCBA Volumes of Negotiated Trade for the 75% Rule
The NCBA 75% rule calls for each region to trade a specific number of head via negotiated cash and negotiated grid (negotiated) each week. For example, Texas-Oklahoma-New Mexico must trade 9,750 negotiated head each week. That figure represents 75% of the volume needed to establish a robust price discovery in the same region.
The Feeder ‘Silo’
As I said earlier, the feeder silo is currently in place but we are waiting on the final structure for the packer silo. So today we’ll focus on the feeder silo. The feeder silo of the 75% rule dictates that “weekly trade 75% or more of its unique “robust” price discovery threshold via negotiated means, no less than 75% of the reporting weeks”. For example, negotiated trade in Kansas must exceed 15,750 head in a given week. Kansas must trade negotiated volume above that threshold 10 weeks out of 13 in a given quarter.
If for some reason Kansas doesn’t trade more than 15,750 head for 10/13 weeks a ‘minor trigger’ is tripped. Three minor triggers in a given quarter yield a ‘major trigger’. Three minor triggers could mean three regions failed to trade their prescribed level of negotiated head at least 10 weeks. Two regions failing to trade their prescribed level of negotiated head at least 10/13 weeks and a packer minor trigger (to be established later) could trigger a major trigger.
Two major triggers tripped in a rolling set of quarters is the point of action. So, a calendar year is not the measure of concern in this framework. A major trigger in Q3 of 2021 and in Q2 of 2022 could result in action. What kind of action is further than the 75% rule? Upon tripping two major triggers within four rolling quarters, the subgroup on markets, “will recommend NCBA pursue legislative or regulatory measures to compel adequate negotiated trade for robust price discovery”. The long and short; if the 75% rule fails it is possible that parties within the cattle industry will support legislative action to increase negotiated trade.
Black Swans and Periodic Adjustments
There are a few things to keep in mind. A subgroup within NCBA will review negotiated trade as it applies to the 75% rule shortly after the conclusion of each quarter. Why? If we have the data, what is the point of a panel review? The short answer is black swans (force majeure, acts of God, etc.). What qualifies as a black swan event? The subgroup will answer that question each quarter. Winter Storm Uri, which hit in February, seems to be a prime example of a qualifying unforeseen event. Though a one week grace period may not seem like much it could easily be make the difference in a potential trigger.
The structure of the 75% rule is also subject to review each quarter. The review process is meant to account to industry changes over time. NCBA lists key points for review including:
- Accounting for changing conditions of supply and demand
- Technological advancements
- Updated academic literature
- Evaluations of the two out of four rolling quarters approach versus alternatives such as two quarters in a calendar year, or any two consecutive quarters
Upcoming Review of the First Quarter
The first quarter has come to a close. To the engaged cattleman it’s no secret that a major trigger was tripped. However, there is more context to the story than simply deeming the first quarter a failure overall. Next week I will break down the data for each region and discuss the resulting triggers. In the meantime if you’d like to go over NCBA’s voluntary framework yourself, you can find it here.