Nalivka: 21st Century Cattle Pricing
The opinions expressed in this column are those of John Nalivka, president of Sterling Marketing, Inc., Vale, Oregon.
As I visit with clients about pricing raw beef and pork cuts and trim going forward, much of our discussion concerns not only the typical supply-demand analysis, but also the changes that have occurred in the supply chain that have an increasingly greater market impact.
One of these changes is who produces and sells ground beef. It used to be a processor who purchased raw lean grinding beef and trim to produce hamburger patties and chubs. Now, ground patties and chubs are produced by packers in the packing plant. While there is an economic incentive, there is also a food safety incentive. The raw material does not leave the plant. This transition in the supply chain started a decade ago and the ramifications are significant in terms of both buyers and sellers in that market.
While market analysts often discuss their thoughts on supply and demand, changes like what I have indicated in the ground beef market are just as important with regard to the market outlook and even further, when discussing buy/sell recommendations for clients in those markets. While I spend most of my time analyzing markets for red meat primal cuts, sub-primal cuts, trim, and the cutout, I think it is important that cattlemen also set the negotiated cash market aside and take a giant leap forward in establishing live cattle pricing.
There are oftentimes less than 10% of the cattle priced in the negotiated cash market today which strongly suggests to me that something needs to change as the industry moves forward. The pork industry made those changes with the lean carcass pricing and last year’s addition of the pork cutout contract. Together, these two prices or values are key prices to “connecting the dots” in the pork supply chain. In short, this is risk management.
The daily reported lean pork carcass value together with the daily reported pork cutout provide the roadmap for fundamental and productive change in the beef pricing model that has existed for 100 years. That is the packer bids the show-list at the feedlot, takes delivery on the cattle and slaughters and fabs them. Meanwhile, he is selling beef and creating a cutout value from the bid and offer prices for the sub-primal items and trim. How does the live cattle price relate to that cutout? That is not necessarily easy to answer and to a large extent, the cattle are priced with regard to the supply of market-ready cattle.
This is where I firmly believe at this point “opportunity plus preparation can equal success” in making changes to the market for pricing cattle. Value is created across the supply chain from the time a calf is born until a steak is cut. However, the distribution of that value is often skewed at best. Negotiated cash markets are like the orphan child and largely unexplainable, yet the industry fights to maintain them. My recommendation is to move ahead and price cattle carcasses off of the cutout. This will connect the dots across the value chain and give cattlemen a solid starting point for negotiating a formula that captures a relevant share of the total value pie.
