Price discovery in today’s fed cattle market “appears to be functioning effectively in even the thinnest regional fed cattle markets,” according to an analysis published by University of Arkansas agricultural economists.
Asked by the U.S. Senate Agricultural Committee to provide an objective analysis of the Cattle Price Discovery and Transparency Act of 2021 prior to deliberations on the bill, the Agricultural Economics and Agribusiness Department and the Fryar Price Risk Management Center of Excellence at the University of Arkansas released its report this week.
“There is no statistically significant relationship between negotiated cash trade volume and either fed cattle prices or beef marketing margins,” the economists said. “In short, our results suggest AMAs (alternative marketing arrangements) do not allow beef packers to increase beef margins and lower cattle prices.”
The authors, John D. Anderson, James L. Mitchell, and Andrew M. McKenzie, said their findings are consistent with previous research and noted that “if transactions are reasonably representative of the overall market, even a relatively small handful of transactions can effectively discover prices.”
The analysis notes that AMAs have become the dominant method of trading fed cattle, but also notes AMAs “reduce transaction costs and provide risk management advantages on both sides of the market.” Yet, the proliferation of AMAs have contributed to the thinning of cash negotiated trade and has raised significant concerns among market participants. Specifically, the concerns relate to the potential exercise of market power by packers to reduce fed cattle prices and/or inflate marketing margins.
However, the authors said fed cattle market data from the last decade give no indication of a positive casual relationship between negotiated trade volumes and fed cattle prices.
“From 2002 to 2015, negotiated sales decreased steadily, and this decline coincided with a substantial increase in prices,” the analysis said. “In fact, record cattle prices in 2014-2015 correspond to the period of lowest negotiated sales. More recently, from 2020 to 2021, fed cattle prices increased 11.7%, while negotiated sales decreased 16.1%. Statistical analysis into the relationship between negotiated fed cattle trade and both price levels and marketing margins supports the conclusions of the informal visual appraisal of the data (and with previous literature): there is no statistically significant relationship between negotiated cash trade volume and either fed cattle prices or beef marketing margins. In short, our results suggest AMAs do not allow beef packers to increase beef margins and lower cattle prices.”
Because AMAs result in a substantial cost savings in the fed cattle market, the authors suggest that if the Cattle Price Discovery and Transparency Act reduces the use of AMAs it will also raise costs in the sector.
“Plant level impacts of the CPDTA may be quite large and will probably actually be greatest in regions where negotiated cash trade is currently highest because plants in these regions could have to adjust the most to comply with the terms of the bill,” the authors said.
Any benefits from reducing the use of AMAs are “generally speculative,” and the authors said any “evidence that higher negotiated trade will positively impact prices, reduce marketing margins, or improve price discovery is lacking.”
If the industry desires greater cash market trades, the authors suggest a “market maker program” to incentivize negotiated cash sales through means of an assessment on AMA cattle would be preferable over a mandate. Such incentive strategies would leave marketing decisions to cattle owners and increase negotiated sales while being “far less costly and less disruptive to the market than a mandate.”
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