Grassley bill would mandate 50 percent cash trade, 14 day delivery for fed cattle

Senator Grassley and others introduced a bill that would require the major meatpackers to obtain at least half of their slaughter cattle through negotiated trade, or a bid-and-buy situation, and would require that all cattle purchased be delivered within 14 days, in an effort to gain better value discovery for fed cattle. Photo by Kristen Schurr

Senator Chuck Grassley and others introduced legislation that would require larger meat packers to buy at least half of their weekly beef slaughter on the open market, and mandates that cattle are delivered within 14 days of delivery.

As boxed beef prices set records week after week – doubling in value over a matter of about 2 months, and fed cattle prices begin a slow upward creep following weeks of rock bottom prices, the entire industry continues to seek answers.

R-CALF USA director and Iowa feeder Eric Nelson points out that in 2014, when cow-calf producers and cattle feeders enjoyed the best prices of their lifetimes, boxed beef was valued at $2.63 per pound and live cattle were worth $1.70.

Last week boxed beef had climbed to $4.75 per pound, and a few head of fed cattle sold for around $1.10 per pound. “If we’d had comparatively the same prices as in 2014, with boxed beef going up that much, live cattle should have been worth $3.08 last week,” said Nelson.

Grassley’s legislation could help with this price disparity by helping to determine a more accurate value for finished cattle.

Currently there is no minimum requirement for cash trades, and the delivery requirement is 30 days after purchase, but Nelson said the 30 day rule is not always enforced.

According to market analysts, the major four meatpackers currently buy about 20 percent or slightly more of their kill on the open market week in and week out, across the nation. It is well known that the packers in the southern region buy far fewer cattle on the open market, as little as 5 percent, while those further north, particularly Iowa and Nebraska, tend to purchase over 20 percent of their needs on the cash market, or in a “bid and buy” deal, most of the time.

The remainder of cattle are procured through contract arrangements, most of which are tied to the spot market. According to Nelson, many, if not most, of the contract agreements do not include a price, but are to be based upon “the market” at the time of the delivery.

Nelson said this type of arrangement gives meatpackers an incentive to depress the live market, knowing it will lower the price they will pay in their formula agreements as well.

While the rule doesn’t require cattle to be sold through an auction market, the cattle owner and the buyer (packer) must agree to a price for the cattle, which must then be delivered within the next 14 days. An auction market situation would be another option.

R-CALF’s advocacy for the measure to increase negotiated trade began with the 2002 and 2008 Farm Bills, and the United States Cattlemen’s Association also advocated in recent months for policies that would increase negotiated trade. NCBA has also said that the cash market is too thin to allow for proper value discovery.

USDA’s mandatory price reporting program requires meatpackers to report the amount they pay for cattle, in an attempt to maintain transparency and provide a fair and competitive market. But because there are so few packers, particularly in some regions such as Colorado, confidentiality rules preclude many, if not most of the already limited amount of sales from being reported at all. This very limited amount of information about what kind and weight of cattle sold where and for how much, makes it difficult for others seeking bids to know what their cattle are worth, said Nelson.

Whether or not this legislation will help push cattle prices up “remains to be seen,” said Nelson, but he points out that there is a high correlation between more bidding and improved prices.

“Typically this time of year is when slaughter cattle prices peak for the year, and it is also the time of year that there is the most cash negotiated cattle,” he said.

“The packers’ biggest expense is cattle. Our biggest source of income is selling cattle.”

The legislation excludes packers who operate just one facility.

Because the legislation puts the onus on the packer, not the feeder, there is no way of knowing which feeders would be affected, said Nelson, but no doubt some feeders will begin selling some or all of their cattle in a “bid and buy” situation rather than formula contracts, if the legislation is enacted.

Nelson said the 14 day rule is as significant as the spot market purchase minimum. While current, law requires that cattle be delivered within 30 days of sale, he himself has experienced, more than once, a packer not “calling for cattle” until at least 6 weeks after the cattle were sold. This forces the feeder to feed the cattle until they are past the ideal slaughter weight, adding feed cost and diminishing the quality of the beef carcass.

In 2015 when the industry saw a backlog of cattle, and many were being overfed, it was due in part to meatpackers not allowing cattle to be delivered in a timely manner, he said. For a cattle feeder, having the assurance that a pen of cattle will be delivered in a timely manner will be a key component of determining their value on the day they are sold, said Nelson.

While R-CALF USA and the United States Cattlemen’s Association have both voicedsupport for Grassley’s legislation, the National Cattlemen’s Beef Association opposes it, saying they are working for a different solution to the lack of price discovery.

“Government mandates, like that being proposed by Senator Grassley, would arbitrarily force many cattle producers to change the way they do business. We will continue to work toward a more equitable solution and invite Senator Grassley, and other lawmakers interested in this conversation, to join us in the search for an industry-led solution based in free market principles,” said South Dakota rancher and NCBA Policy Division Chair Todd Wilkinson.

At least two state NCBA affiliates, the Nebraska Cattlemen’s Association and the Iowa Cattlemen’s association back the 50/14 rule. Nebraska is the second largest cattle feeding state, while Iowa ranks number five. Texas is first, Kansas is third and Colorado is fourth.

Cattlemen in Nebraska historically participate in cash negotiated sales at a higher level than other cattle feeding regions in the U.S., said a Nebrasksa Cattlemen’s news release.

“Many NC members have repeatedly expressed concerns about the increasing number of cattle sold on a formula basis, lessening the robust price discovery that cash negotiation sales bring to the table,” said Ken Herz, Nebraska Cattlemen President “While NC policy typically discourages mandates, we understand the urgent need to regain leverage, competitiveness and price discovery.”

The Iowa Cattlemen also see the legislation as crucial at this point. Nelson said he has many cattle feeding friends waiting for bids on overfed cattle. He himself just sold some cattle, after waiting 7 weeks for a bid.

“Traditionally, the cattle industry does not support increased regulation. But at this point, we have exhausted all other options, and we cannot allow Iowa’s cattle producers to continue carrying the burden of price discovery for the entire industry – especially when it does not bode well for producer leverage. The Iowa Cattlemen’s Association is grateful for the support and leadership of Iowa’s senators on this topic and many others that affect our producers every day,” Matt Deppe, CEO of Iowa Cattlemen’s Association said.

Republican Iowa Senator, a longtime champion for the independent cattle producer, Grassley introduced a similar bill in 2002 and 2007 (S.786).

Sens. Jon Tester (D-Mont.), Tina Smith (D-Minn.), Joni Ernst (R-Iowa), Mike Rounds (R-S.D.), Cindy Hyde-Smith (R-Miss.) and Steve Daines (R-Mont.) co-sponsored the bill.