Nalivka: Building Demand And Managing Risk

I read the latest version of the Cattle Market Transparency Act, compliments of Senators Deb Fischer (R-NE) and Ron Wyden (D-OR) this week and wrote a few notes for the Idaho Cattle Association where I am honored to serve as Market Committee Chairman.   No, I am not off track from the title of this article.  This legislation probably affects your ranch revenue, just not in the way you may think.   

Anytime I see proposed legislation that is perceived to make markets work better and solve a problem, particularly with the word “mandate”, I see the problem becoming worse.   So, my question is – why on earth would the industry want politicians to write legislation mandating, I repeat – mandating, regional negotiated minimum cash prices?

The U.S. beef industry from end-to-end represents true economic efficiency.  We can argue all day about profitability across the supply chain, but the bottom line is that every day there are ranchers, cattle feeders, packers, and processors working to deliver an abundant supply of quality beef to American consumers and global customers at an affordable price.  I repeat - quality U.S. beef and this consistent supply of consistently quality beef available to U.S. and global consumers is the key to building demand.  

This is accomplished through the ability to send the right market signals down the supply chain to ranchers who then are able to build a genetic base within their herd that produces the “right cattle to produce beef that consumers desire and will buy.”

In the last several years, formula pricing through branded programs with premiums provide the best incentive.  This is not mandated minimum cash negotiated prices.  Simply speaking, the industry is linking the supply chain through communication.   While I am not naïve enough to think the system is perfect, the industry is pointed in the right direction – forward toward new pricing methods.

Last November, CME initiated and began trading the Pork Cutout contract. I wrote about that and presented the idea of initiating a Beef Cutout futures contract.  Furthermore, the idea of pricing finished cattle off of a Beef Cutout Index to create a price-value relationship.  The process is started as CME will soon publish a Beef Cutout Index.  There is still much work to be done.  The prospects for success if the entire industry will put their arms around this concept are much better than looking to politicians to create legislation mandating minimum cash negotiated prices!   In short, forward thinking pricing building demand and managing risk.


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