The price discovery network | TSLN.com

The price discovery network

Loretta Sorensen
for Tri-State Livestock News

Price discovery is “the process of buyers and sellers arriving at a transaction price for a given quality and quantity of a product at a given time and place.” According to CSU's Steven Koontz

What's a fair price for beef today? Tracking down the answer to that question requires working through the price discovery process, and that isn't easy.

Stephen Koontz, Colorado State University Professor of Agricultural and Resource Economics, and Bill Bullard, former cow/calf rancher from South Dakota's Perkins County and chief executive officer of Ranchers-Cattlemen Action Legal Fund (R-CALF), track and examine the many aspects of price discovery.

"Price discovery is work," Koontz says. "It's the bid-ask process of discovering a product's value. A market engages in price discovery when it reveals the changing market conditions. For example, the Futures market does a lot of price discovery. Changing market conditions are seen there first, then it has an impact on the cash market."

Price discovery and price determination are sometimes perceived to be the same process, but experts say that's not true. Price determination involves interaction of supply and demand to determine a general price level. Broad factors affecting the amount of beef consumed include the price of products produced from fed cattle (beef), price of competing products (pork and poultry), consumer income and consumer tastes and preferences.

Price discovery is "the process of buyers and sellers arriving at a transaction price for a given quality and quantity of a product at a given time and place." Price discovery involves interrelated concepts that include market structure (number, size, location, and competitiveness of buyers and sellers); market behavior (buyer procurement and pricing methods); market information and price reporting (amount, timeliness, and reliability of information); and futures markets and risk management alternatives.

Price determination and price discovery are interrelated. Price determination finds the market price level, which may be high or low. When market prices are low or falling, questions and concerns about price discovery increase. When demand is strong or expanding and supplies relative to processing capacity are small or declining, price discovery problems are generally not a major concern. Under these conditions, competition is generally keen, thus ensuring efficient price discovery. Large supplies of pork or poultry may make the price discovery more complex

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Market changes affecting beef prices are found in consumer preferences; U.S. economic conditions; strength of the dollar in foreign countries; trade tensions related to exports, imports and bans; shipping technologies and issues; slaughter facility trends and changing technology, and politics among others.

Bullard says the push in recent years by four dominant multi-national meatpackers Tyson, Cargill, National Beef and JBS, to capture control over the live cattle supply chain is weakening competitive pricing and dismantling the price discovery process.

"With gross receipts averaging $50 billion annually, the live cattle industry is the single largest segment of American agriculture and is, consequently, critically important to the prosperity of rural America," Bullard says. "In many respects, the live cattle supply chain is the meatpackers' 'last frontier,' as it represents the last major U.S. livestock or poultry sector that continues to resist the birth-(or egg-)to-plate corporate control manifest under the industrialized livestock and poultry production model."

Koontz, a university faculty member for 25 years, has worked on price discovery, market power, futures markets, commodity price forecasting and other agricultural economic questions throughout his career.

"The markets involved in beef pricing include calf, stocker, feeder, fed, boxed beef and individual cuts markets and food service," Koontz says. "That's a lot of markets. You need good valuations at each stage of those markets to get the right valuation back to the calf producer. Notice I said good and right and not high. Sometimes a low price is discovered if the beef producers offer a product no one downstream wants."

Markets are at the heart of the price discovery system, playing a significant role in the process. Koontz notes that markets coordinate producers and consumers in a capitalist market economy.

"We take markets for granted," Koontz says. "We just assume they're going to be there. That's a problem. Free markets are not free. Markets consume resources. In that context, people try to not use them, or make using them cheaper. Periodically we need to make sure our markets are working for us, doing what we want them to do. There are vegetable producers who don't have markets like beef producers. They negotiate with big retailers. That negotiation adds to product cost. Beef producers have a lot more opportunity because we have a lot more markets."

Bullard believes the beef industry market isn't working anymore because the "real-time" value of beef animals is now often determined by as little as 1.5 percent of the sold price of cattle in Texas and New Mexico. Just 10 years ago, in 2005, price was determined by the sale price of 50 percent or more of the cattle sold.

"Packers are using a complicated form for purchasing cattle that allows them to buy animals without having to negotiate a price," Bullard says. "Cattle are committed to them and price is based on the previous week's cash market. Our current system needs new policies that level the playing field between producers and meat packers."

The term price discovery was coined in the 1960s.

"In the 1960s we started to understand how markets work," Koontz says. "Markets as a field of study began in the 1920s. Prior to that the topic was largely unstudied. We just didn't have much thinking that was communicated in textbooks and used in university classrooms or primary education."

Since 1960, markets have been a persistent topic of study. Examination of markets intensifies if market signals seem unusual.

"For example, in the 1980s, there were very substantial declines in beef demand," Koontz says. "The concern was that producers weren't getting the right signals and were producing products consumers didn't want. Product quality – in particular lack of meat tenderness – was an issue. So was price discovery. Now we have a lot of formula marketing and less cash trade. An important question today is whether or not there's enough cash trade to do a good job with price discovery of fed cattle."

"No, there isn't enough cash trade to determine the true value of beef animals," Bullard says and also points to political pressure to increase demand of beef imports from countries like Brazil and Argentina, who have developed a grain-fed system that mimics the U.S. feeding process.

"Countries like Canada have improved the quality of their beef with a grain-fed system," Bullard says. "The big four meat packers want to increase imports of lower priced beef because that's an advantage to them. Mandatory Country of Origin Labeling (COOL) would give consumers the last word on the beef they prefer, but these major packers aren't in favor of that and are trying to stop that legislation."

"Politics and economics are powerful forces in the beef industry, affecting true price discovery," Bullard says. "Events such as the West Coast shipping strike also affect beef supply and costs. The strike caused a glut of beef products. However, with U.S. beef numbers the lowest in 70 years, U.S. beef supplies are extremely tight and the shipping problems didn't significantly impact beef prices."

Bullard believes genuine price discovery is at risk as long as there is a major lack of market competition caused by domination of just four major meat packers.

"It's already happened to the poultry and pork industry. Producers in those industries don't own facilities, animals or feed. They simply carry out the production instructions of the packers. The beef industry is quickly succumbing to those same efforts of the packers to capture control of the live cattle chain."

"Price discovery is one of those things PhD economists love to think about and it makes most people's head hurt," Koontz adds. "But markets are important and it takes some specialized education – or training of yourself – to think about the topic."

The Senate, Sept. 21, passed the Agriculture Reauthorization Act of 2015 (H.R. 2051) that included three key provisions – the Livestock Mandatory Price Reporting Act, the U.S. Grain Standards Act and the National Forest Foundation Act.

The House version of the Mandatory Price Reporting Act was different than the Senate’s so the bill will now be back in front of the House, and they will need to pass the Senate version by Sept. 30, in order for the bill to take effect. The The Senate’s bill does not include emergency authority for reporting during a government shutdown. The House legislation does, by calling it an “essential service.”

Cattle and beef groups responded to the news.

“We appreciate the Senate’s reauthorization of this provision before it expired at the end of the month. Unfortunately, due to the actions of Senator Stabenow, not only does this legislation lack the status of an essential service, the bill differs substantially from the House version; subjecting producers to further delay and uncertainty….for American’s cattlemen and women, market transparency is not a luxury.”

NCBA President Philip Ellis

“We believe that Congress failed its duty to update the Act to reflect today’s market conditions. Within just the past five years, the volume of cattle in the national price-discovering cash market was reduced by the concentrated packers from over 37 percent in 2010 to only about 20 percent today. In some regions the volume in the price discovery market is down to 1.5 percent. The marketplace is not competitive and prices are not transparent when producers receive pricing information on only 1.5 percent of the hundreds of thousands of cattle that the packers have actually purchased. Both the House and the Senate have done a disservice to our nation’s independent cattle producers.”

R-CALF USA CEO Bill Bullard

“We appareciate the work of the Senate Ag committee to get this put together in a timely fashion. The House did a great job of reaching out to stakeholders and there was good discussion. they needed this thing to sail thru the ag committee and full floor of senate. We’ll continue to roll up our sleeves on price reporting and how it functions –the importan part was the mandatory part in the law.”

USCA Executive Director Jess Peterson

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