It was a Friday afternoon in early August and live cattle traded from $113.00 to $114.00 according to USDA reports on Monday, August 6, 2018. Montana rancher and cattle feeder Shane Eaton was encouraged seeing cattle short and bidding active. But then that Monday he was perplexed when an unusually large number of live cattle were traded at $112.50, a dollar and half lower than the Friday before. This wasn’t the first time, and certainly not the last, that Eaton observed cash trades going astray from the “fundamentals.”
After researching, Eaton discovered the Monday trade reported on Tuesday, August 7, was that of 3,600 foreign born cattle. This trade pushed the price down for the following week, Eaton explained.
“I believe the weekly price drop in Nebraska from $113.36 the week of August 6 to $111.26 the week of August 13 was precipitated by the Monday, August 6 trade of foreign born cattle,” he said.
The fact that the trade was foreign born cattle is not disclosed in Mandatory Price Reporting (MPR). When packers are required to fill out “Live Cattle Daily Reports” they merely distinguish steers, heifers, and dairy influence cattle. The report offers two source classes including “domestic” and “imported”. However, “Imported” cattle are those raised to slaughter weight outside of the 50 states or livestock products produced outside of the 50 states. According to a USDA spokesperson, any cattle that do not fit the definition of “Imported” are considered “Domestic.” Cattle born outside the U.S. and fed to finish within the 50 states are, therefore, “Domestic.”
The language used in MPR may not distinguish quality differences in cattle traded, in turn manipulating the markets for the week, United States Cattlemen’s Association (USCA) Senior Policy Advisor Jess Peterson explained.
“As you know, when live cattle trade at a lower level early in the week it sets the stage to lower the cash for both live and feeders,” Peterson said. “Sometimes fundamentals drive this and other times subpar quality cattle such as Mexican steers will be cash traded lower and the rest of the market follows as it responds to what appears to be a trade setting number. That trade should actually differentiate foreign or domestic born cattle and therefore a difference in potential quality.”
Adding to the concern, there is already a limited cash trade market for live cattle, so transparency in the reports is critical, Eaton said. In the August 13 reports Eaton referenced, total cash traded cattle was 7,946 head in Kansas and 6,461 head in Texas.
Just last month in the report for the week ending June 17, for example, only 2,000 head out of 75,000 in Texas were cash traded.
“So you can see how easily foreign born cattle could influence the cash trade for the week. The need for transparency in the thinly traded cash market is a must,” Eaton said.
A lack of transparency in MPR of live cattle affects all aspects of the market, Eaton explained. The cash price also sets the base price for grid and formula fat cattle. So when the cash is set lower early in the week, the base price is lowered and this “essentially lowers the net price packers pay for the vast majority of cattle they buy every week in the grid or formula,” Eaton explained. “The lack of transparency in the cash trade has allowed the fat cattle industry the ability to set the price of apples by using oranges.”
Considering the fact that only “cattle born and raised in the U.S. are eligible for delivery against the CME Live Cattle contract” it is also critical that foreign born cattle are clearly distinguished through MPR. The Feeder Index is similar in that only U.S. born and raised feeders are included in the data to calculate the index. So live cattle reports must accurately reflect whether cattle are foreign born or domestic, according to Eaton.
As Northeastern Director for Montana Stockgrowers Association (MSGA) Eaton took the initiative to write policy to improve MPR. MSGA adopted the policy that states, “in an effort to improve transparency and to prevent market manipulation, MSGA supports changing MPR for live cattle to add a division such as ‘non-native.’”
Through discussions with USDA personnel, MSGA and USCA, whom has already adopted the policy, concur that the best route to implement these changes is through the 2020 reauthorization of MPR. Through the reauthorization process, industry stakeholders are welcomed to provide input on possible improvements and changes.
MSGA, in presenting the policy at the National Cattlemen’s Beef Association (NCBA) Summer Business Meeting, is hopeful that NCBA will adopt the policy to carry to reauthorization meetings as well. As of press time, NCBA has not announced any action on the policy.BACK