New online format allows feeders chance for more competitive bidding on fed cattle
Beginning on Oct. 5, 2016, USDA AMS Livestock, Poultry, and Grain Market News began including in the National and Regional direct negotiated slaughter cattle reports, cattle purchased through the Fed Cattle Exchange by packers required to report according to the LMR Act and regulation.
Based on the weekly sales activity since launching in May of this year, approximately 1,800 head of cattle per week have been offered through the Fed Cattle Exchange at price levels in line with the current weekly reported markets. LPGMN estimates the addition of these transactions in LMR will increase the reported weekly volume of negotiated purchases from 1.5 to 2 percent.
Jim Robb with the Livestock Marketing Information Center said he doesn’t know yet what affect these sales will have on the data he interprets week in and week out.
It will depend on the volume of cattle sold.
“Now we’ll be able to gauge it. As this goes forward over the next several months, we’ll see if negotiated transactions increase,” he said. At this point, it is unclear whether feeders are selling cattle they would have normally sold on the cash market through the Fed Cattle Exchange or if they are choosing to sell additional cattle – some that would have otherwise been sold via formula pricing, grid pricing or contracts.
“It’s a challenge to get good reporting,” he said, because of the low number of cash sales. “To be honest if this and other things don’t work, in five or ten years, we will have to do something different. We’ll still have cattle feedlots and fed cattle marketing but it could look different if we don’t have some form of negotiated cash trade.”
The U.S. Department of Agriculture announced at the end of September that the negotiated trades of slaughter-ready cattle on a new online platform will now be included in “livestock mandatory reporting” data.
Starting October 5, cattle sales that take place on the Fed Cattle Exchange, a new online bidding program for market-ready cattle, are now included in the USDA’s mandatory price reporting data.
Jim Robb, with the Livestock Marketing Information Center based out of Denver said that the feeders involved in developing the Fed Cattle Exchange requested the data be used in USDA’s price reporting information, in order to give the industry a more accurate picture of a true current market. “The concern of the industry is we have less and less of traditional negotiated transactions on the fed cattle side. Those are what drive the rest of the industry,” he said.
A lot of fed cattle are sold on a formula pricing contract, Robb said. But without accurate market information, the buyers and sellers don’t know where to begin.
“Formulas are mostly based on negotiated transactions. Those have gotten thinner and thinner. We are hoping this (The Fed Cattle Exchange) will increase negotiated and cash market trade.”
To encourage more cash trading, which ultimately encourages more competition and helps provide more accurate information about the day-to-day market, Oklahoma-based cattle feeder Jordan Levi presented to the Texas Cattle Feeders Association an online bidding platform for fed cattle. He then pitched the idea to the National Cattlemen’s Beef Association, and Superior Livestock Auction agreed to host the sales. So last spring the Fed Cattle Exchange was born.
Levi said he has always sold some cattle on the cash market, but even those deals are direct agreements. The cattle don’t go through an auction market where more than one bidder can engage at one time.
In the nine sales that the Fed Cattle Exchange has hosted, all four of the big packers have bid on cattle, along with some smaller, regional packers, said Fed Cattle Exchange manager Sam Hughes.
To consign cattle, sellers can create an account online at fedcattleexchange.com. They submit one to four photos of each pen of cattle by noon Monday of the week they want to sell.
Sales are held on Wednesdays at 10 a.m., Hughes said. Unlike traditional sales hosted by Superior Livestock Auction, the cattle are not shown on a video so packer bidders still travel to the feedlot and view the cattle in person, he said.
“This isn’t much different than a normal country trade transaction. The buyers still come look at the cattle,” Hughes said.
Eventually videos might be included in the marketing of the cattle but it isn’t an immediate goal, Hughes said.
The pens of cattle up for sale tend to be anywhere from 40 head to 200 or 300 head at a time. Superior charges $1 per head commission on every head consigned. The feeder can include a starting price for the bidding. Buyers log in through Superior’s website and then bid online in increments of 25 cents per hundredweight.
The buyer pays the seller directly and the seller can choose between three options for delivery: 1-9 days, 1-17 days or 10-17 days. The buyer can pick up the cattle on any day within that window set by the seller.
Last week the Fed Cattle Exchange hosted their biggest sale – offering 4,225 head for bid. Most of the cattle come from Kansas and Nebraska, but cattle from Colorado, Oklahoma, Texas, Iowa, Illinois and South Dakota have been consigned.
Hughes said he and others are particularly interested in growing the number of consignments from the Texas and Oklahoma regions as those areas currently experience the fewest numbers of cash trades. “They are interested. It’s just a matter of having them warm up to the idea and helping them realize that they would be better off selling this way,” he said.
Levi said he doesn’t plan to sell all of his fat cattle on the Fed Cattle Exchange but he will plan to market a certain percentage this way, and he hopes the industry will do the same, in order to encourage frequency and price discovery and reduce market volatility. A majority of his cattle will always be sold using formulas, he believes, but an honest market value must be established first because all formulas are based on the cash market.
“The goal is for people to sell a small, variable percentage of their weekly show list so that we can get representative starting prices for our business to business relationships,” Levi said.
NCBA spokesman Colin Woodall said his group has always believed that viable futures contracts and a strong cash cattle market were important. “We support the Fed Cattle Exchange and the use of technology to fill some of the gap in the cash cattle trade. Over time, we believe this will be a helpful tool, especially as that data rolls into Mandatory Price Reports,” he said.
R-CALF USA also likes the sale platform, but says more needs to be done.
“While we fully support this idea, it is, unfortunately, too little too late for many independent cattle feeders and producers who have lost equity, if not their entire operations, only because packers were allowed to freely exercise their tremendous market leverage accorded them by the ultra-thin cash market for the past 11 years. Not since 2005 was the majority of fed cattle marketed through the price-discovering cash market…we must accompany this idea with a ban on packer ownership of livestock and a prohibition against formula contracts that do not contain a base price (which incentivizes packers to keep the volume of cattle sold in the cash market as low as possible),” said CEO Bill Bullard.
He believes there are some industry participants pressuring others to avoid selling on the Fed Cattle Exchange.
“The beauty of the Fed Cattle Exchange is that it brings all packers to a feedyard that might not have seen all the packers in the past,” Levi said.
“We’re seeing a premium brought on the exchange,” said Hughes. “When multiple packers bid on one pen of cattle in creates more competition and more true price discovery.”