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Don't let the US cattle market snowball broken [Opinion] | Agriculture and Agritourism News

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Here’s a winter analogy.

It was so harmless in its early days, just a snowflake sitting on top of the mountain surrounded by other snowflakes. But soon he turned into a snowball possessing both mass and weight, and he began to make a strong impression.

Then, its mass and weight increasing, the harmless snowflake, which had become a snowball, broke free of its inertia and began to move.

The momentum quickly took over as the snowball intertwined with other snowflakes, increasing exponentially. It swept down the mountain, leaving only the carcasses of trees in its wake.

And that, my friends, describes the stalled US cattle market.

Alright, let me explain.

This analogy tells us that a catastrophic outcome has a beginning – a beginning whose outcome could probably not be predicted. In other words, today’s huge problems all started small somewhere, and then additional forces interacted to produce what is, in this case, a catastrophic outcome.

So to solve today’s huge problem, which is today’s broken cattle market, we have to go back to its beginnings.

Today’s huge problem looks like this: competitive market revenues once allocated to US cattle producers have been diverted and redirected to beef packers and retailers, causing a disconnect between cattle prices and beef prices. This is why consumers paid super inflated prices for beef while cattle prices remained seriously depressed. Even with the current increase in cattle prices, the gap between cattle prices and beef prices remains historically large.

So now we know the disastrous outcome, but where did this snowflake turned snowball turned destructive force come from?

Not so long ago, the four largest beef packers ate almost all of the smaller packers, and with their dominant market share, they were able to control who had access to the market in a timely manner. They have created a market access risk for cattle producers. The snowflake was rather innocuous, as no one knew what the outcome might be.

But around that time, consumers started eating more beef, and they had been for more than a decade. Thus, slaughterhouses needed more cattle and were reluctant to deny timely market access to too many cattle producers. So the snowflake sat here for a while in its new landscape.

And while they sat there, packers started experimenting with new ways to buy cattle, and they invented a new device that complemented their ability to impose market access risk on cattlemen.

The new device was a formula contract. He took the cattle out of the competitive cash market, turned those cattle over to the packer, and set no price. The price would be tied to the price that the competitive spot market would determine in the future. This has made the competitive spot market a residual market – a tool that packers can use to eventually price all of their formula cattle. The snowflake turned into a snowball and started to make a strong impression.

And then packers started exploiting market access risk by promising quick market access in exchange for a formula contract. In other words, to ensure timely market access, producers had to commit their cattle to a formula contract that contained no price. The snowflake turned into a snowball began to gain mass and weight and began to move.

Then came the acceleration of the snowball. Beef packers began to withdraw more and more cattle from the competitive cash market, which added more cattle to their formula contract reserves. This has resulted in a shrinking competitive spot market, making it too narrow to price competitively.

A new report by Professor C. Robert Taylor shows where and how the current disconnect between retail beef prices and live cattle prices is coming from.

By relegating the competitive cash market to a residual market, and then linking formula contracts to that residual market to determine a future price, packers transferred their risk of buying cattle to the residual market and anyone participating in it.

Taylor’s report suggests that because packers have now institutionalized the link between formula contracts and the price determined in the residual and competitive spot market – and because packers can move in and out of this residual and competitive spot market at will, based on their formula contract commitments and anticipated demand for beef — the competitive residual cash market has become significantly risky, and this risk increases exponentially as the volume of formula contracts increases.

Taylor’s findings strongly support our long-standing contention that packers’ use of these formula contracts is inherently unfair and anti-competitive.

We have to regulate this by legislation. Let’s not let this snowball do more damage.

.

techsm5

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