Cattle feeders need to put more fed animals into the cash market, says Dr. Kee Jim, long-time feeder and veterinarian.
He said the number of cattle going into cash over the last 20 years has significantly declined. That is beginning to change in the United States and should happen in Canada to help establish a transparent base price in a situation where numerous suppliers sell to few packers.
“I don’t claim to know what that number is, but I know it’s not zero,” he said during a Livestock Marketers of Saskatchewan webinar, referring to what percentage would have to move to cash to have a functional market.
He discussed the four ways cattle move to market.
Negotiated cash is when cattle are on a bid-ask system and move as cash trade.
“If you go back to January of ’02 and ’03 in the U.S., that number was 50 to 60 percent of the trade and that’s diminished down to roughly 20 percent,” he said.
Most fed cattle are now traded on a formula that includes discounts and premiums for various carcass traits. That percentage has steadily risen since 2004 from just more than 20 percent to about 70 percent.
“The issue is that the formula cattle, the base price comes from the negotiated cash price,” he said.
Forward contracted cattle are priced against futures and represent about 10 percent of the market, an amount that has remained steady, he said.
Finally there is the negotiated grid, where there is a negotiation on base price and then cattle are put into the grid.
“That’s a fairly small percentage of the cattle and we probably wouldn’t be having this discussion if the negotiated grid number was up there with what the negotiated cash has historically been,” Jim said.
In Canada, packers stopped reporting this data to Canfax about 10 years ago, leading to a best guess of 15 to 20 percent negotiated cash cattle in this country.
We do know that in certain weeks of the year there is no negotiated cash trade for Canfax to report, so I think it’s pretty safe to say that the trend in negotiated cash in Canada is distinctly downward here as well.”
Jim said the industry reached this point for several reasons. In the early 1990s, U.S. fed cattle were traded as a commodity with little differentiation of value by carcass.
“Typically the feedlots in the U.S. would put up a show list. They sold the entire show list at the same average price, often live,” he said.
Feedlots were encouraged to sell everything at the same price because there was significant variation in cattle type and they wanted all customers to pay the same price.
“What this did was encourage inferior type cattle to be selling at the average. It was doing nothing for improving the quality grade on the cattle and ultimately the eating experience of the consumer,” he said.
Packers implemented grids to improve quality and paid premiums and discounts for marbling, yield grade and carcass weights.
This improved price signals at market and quality grades rose.
When Cargill opened its High River, Alta., plant in 1989, it implemented a grid as well.
“Prior to that … the system in Western Canada was actually a sealed bid system where we had the shoot-out at the OK Corral every Thursday and the cattle were traded in that fashion,” Jim said.
“It’s unlikely we’ll ever get back to a sealed bid system, where all cattle were selling on one day, but at that point in time we also had seven to eight packers to sell to, all bidding on a sealed bid system on a single day. That was probably the height of feedlot leverage.”
Jim said while formula price arrangements make sense, they require a cash base price. A viable cash market is necessary, he said, or else the entire chain suffers.
Price discovery has been hotly debated in the U.S. Price reporting is mandated and cattle trade is reported weekly.
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