Contract Library: Omnibus bill expected to finance cattle contract library pilot project
The omnibus spending bill expected to be signed by President Biden shortly after this paper goes to press, includes $1 million to fund a cattle contract library.
The idea is to establish a library of contracts for the Agricultural Marketing Service (AMS) to report terms to alternative marketing agreements between packers and producers. Although some negotiated cash fed cattle sales are reported through LMR, commonly known as mandatory price reporting, there is no way of knowing what contracts are being used between feeders and packers.
Tanner Beymer, National Cattlemen’s Beef Association policy analyst, said his organization has long advocated for this contract library.
“Information is power. You have to know what your options are,” said Beymer, regarding how this might help cattle feeders or producers.
He said hopefully a contract library would provide smaller producers who don’t currently have packer contracts with sufficient information to negotiate with packers in the future.
Beymer also believes that providing cattle producers information about which cattle are valued higher will help them make production decisions as they aim to hit a value-added market. “If you’re in the business of raising beef cattle, ultimately you’re looking at a price derivative of the fed cattle price,” he said.
Beymer believes that if, for example, NHTC (non-hormone treated cattle) or CAB (Certified Angus Beef) cattle are demanding premiums through contractual agreements, that producers will be able to adjust their breeding or management plans to attempt to fill demand for those value-added products.
He doesn’t believe the contract library will lessen the volume of cash negotiated trade. “For the people who trade cash – it works for their operations,” he said.
NCBA asked packers to buy more cattle through negotiated cash deals, and although “it wasn’t the amount of progress we had hoped to see,” Beymer said that in the southern plains, some cattle feeders upped their cash trade percentages.
In a news release, NCBA said other programs they support are financed through the omnibus bill such as the Electronic Logging Device exemption for livestock haulers, important EPA regulatory relief, and an extension of the Livestock Mandatory Reporting program.
USCA’s Brett Crosby of Wyoming said the contract library could be a helpful tool, but that “the devil’s in the details,” and that USDA’s implementation of the concept will determine its effectiveness. He said the contract library came into existence as a means to fix the “unintended consequences” of LMR. “With the contract library, there may be some more unintended consequences that we’ll have to visit later,” he said.
“Ideally, in a perfect world, we’d be able to see the base price grid structure and total number – or number range – for every contract agreed to between packers and feeders,” he said.
“That’s what we call transaction level data,” said Crosby. That data should be helpful to feeders as they make decisions, he said.
It’s possible that the contract library could actually cause the percent of cash negotiated trade to be lessened, he said, but he expects that negotiated grid deals will likely increase at the same time.
Crosby said more information is always good, “as long as there is a limit to how it can be used,” he said. He said Livestock Mandatory Reporting was a good idea but that it “cannibalized the cash trade. And now we’re at a point that we can see that formula trade is going to be the trade of the future because people want to see how their cattle do on the grid.”
R-CALF USA director Eric Nelson of Moville, Iowa, fears that, without competition reform such as 50-14, a contract library will push an already fragile industry in front of a speeding train.
When the hog industry was facing significant vertical integration, with less and less cash trade, a contract library served to provide the means further increase the number of hogs sold on contracts. Nelson said that in the swine industry, small independent feeders were not given contracts, and most were forced to exit the industry, while large barns were built on contract deals.
“They ended up leaving out the little guys – the little guys had knowledge of the contracts, but that didn’t mean they had the leverage to get contracts. There is an assumption that contracts are great, but contracts are based on a functioning cash market,” pointed out Nelson.
A solution would be “a return to competition,” said Nelson. “Until we can get the government to enforce anti-trust laws, we need 50-14,” he said.
“Unless we stop integration, nobody will know what the cattle market is. And there are a lot of days where we are close to that,” Nelson said.
R-CALF USA president Brett Kenzy believes the contract library and other pieces of legislation including the cattle market compromise bill are much ado about nothing and he points out that, while well-intentioned, the contract library is not a solution. “Never confuse activity with progress,” he said.
Cash trade is the only way that the cattle market can truly respond to the world around it in real time, he said. “Cash negotiated is more able to react in real time and provide accurate real time value discovery,” he said. “I don’t think cash trade is sunshine and lollipops but it is the glue that hold supply and demand economics together,” he said.
“The academics don’t live in the real world with us. They can’t take the whole world into account like the market can. The market can take into account the weather, Ukraine, everything doing on any given day. There is no way you can accurately replace that.”
Kenzy likened the contract library to opening the mailbox and seeing the Sears catalog when he was a kid. “Just because I get it in the mail doesn’t mean I have access to what’s in the pictures,” he said.“
More information is good, but not necessarily a viable solution here, he said. “I guess knowledge is power but as far as it (the contract library) being a profitability driver, I don’t know.”
“Therein lies the beauty of 50-14. It’s not just about cash trade, it’s about delivery and a more informed futures market. Increased cash trade values might not always be higher, but those values will be more real.”
Competition is the solution the industry needs, and it won’t come from more contracts or even more information about contracts, he said.
“Daily cash trade – that give and take between a buyer and a seller in an open competitive forum, that’s what correlates beef price to cattle price,” said Kenzy.
“No matter how much reporting you do on a fixed game, if you don’t do something to solve the problem, the game is still fixed.”
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