Seeking Solutions


by Kayla Sargent

They say repairing the roof in the middle of the storm may not yield the best long-term results, Don Schiefelbein said.

Then there’s the old adage about striking while the iron is hot, Corbitt Wall explained.

While the approach to solve our cattle market concerns may not be one that is easily agreed upon, most producers and feeders can concur that the thinly negotiated cash market is a problem.

“Everybody agrees that price discovery is broken and something needs to be fixed,” Schiefelbein, National Cattlemen’s Beef Association (NCBA) Vice President, said.  “If you look at the number of cattle that are pricing the balance of the cattle, it’s just far too thin.  You can’t have, in some cases, 5 percent of the cattle setting the price for 95 percent of the cattle.  So, from that fundamental problem, the industry is right, something needs to be done.”

What needs to be done becomes a bit less clear than defining the problem.

One solution recently introduced by Senator Chuck Grassley (R-IA) and Senator Jon Tester (D-MT) would mandate large-scale packers to procure a minimum of 50 percent of their total cattle purchases on the cash market each week.  Specifically, the mandate would apply to packing facilities which slaughter over 125,000 head per year.   Purchases made under the minimum requirement would have to be delivered within 14 days or less after the date they are sold to the packer.

 

Setting a Minimum…

 

This bill closely resembles a proposal spearheaded by United States Cattlemen’s Association (USCA) known as the 30-14 rule.  Wall, through his Feeder Flash platform, was a major proponent of the 30-14 rule and said the recent bill is a direct result of the push for change.

“We’ve been pushing some type of minimum cash requirement for the last several months here and 30 was always a minimum,” Wall explained.

Agreeing on a 30 percent minimum for the initial proposal took into consideration the needs of corporate feeders and cattle producers alike and states all across the nation.  While Iowa typically sees about 50 percent negotiated trades and Nebraska averages around 30 percent already, states like Texas may see as few as 7 percent of fat cattle sold on the cash market.  So, 30 percent became the compromising point, but as the push for 30-14 grew, Northern Plains and Midwestern states were the ones “doing all the heavy lifting,” according to Wall.

“And they had policy for 50 already, so that’s really all they could push for and that’s what got pushed through,” Wall said.

Going from, say, 7 percent cash trades, to a mandated 50 percent per packing facility per week would mean a major shift in marketing tactics.

“It’ll upset the apple cart as far as fed cattle marketing in the South.  It’ll completely change it,” Wall said.  “And maybe that’s what needs to happen.  Maybe they’ll come up with something better.  You know, 93 percent of the cattle being priced off 7 percent is not working.”

 

A Step Backward or Forward…

 

But changing that marketing model in such a major fashion is concerning for some.  Schiefelbein thinks that mandating a minimum cash trade would be a step backward for the industry.  He compared it to the usage of Wi-Fi in homes across the nation.

“As you know, at certain times when everybody’s on the internet or on the Wi-Fi, you slow down and cuss your Wi-Fi and you say, ‘boy, it would work a lot better if a bunch of these people weren’t on it,’” he explained.  “So, what our industry is trying to do is say, ‘okay, to fix our Wi-Fi problem, we’re going to mandate that 20 to 30 percent, or in some cases such as this bill, 50 percent of our people don’t have the option of Wi-Fi anymore, they have to go back to antennas.’”

While that may make the Wi-Fi function better for the 50 percent that still have it, Schiefelbein said it’s important to understand why Wi-Fi was implemented in the first place.  Such was the case with the transition away from trading fat cattle on the cash market.

“Unfortunately, I think the solution they’re doing is what they consider a quick fix, silver bullet solution and often times those are not as simple or as well thought out as they ought to be,” Schiefelbein said.  “From my perspective, what they’re missing is why did we go from cash to where we are with formulas and grids?  Obviously, the industry moved in that direction for a reason.”

 

Pricing on Quality…

 

Over the past 15 years, Schiefelbein said beef demand has drastically improved, thanks in part to the information being relayed to feeders and producers through the current marketing system and usage of grids and formulas.  Through these transactions, quality grade, yield grade, and consumer’s demands matter as carcasses are priced on their individual value rather than a net merit average, he explained.

“So that’s one thing, an important efficiency gain and demand gain that’s so important to our industry that we just can’t live without it,” Schiefelbein said.  “If you start taking away those signals sending back value to feed yards and building cattle based on value, you lose a lot of potential.”

In his particular situation, Schiefelbein runs a successful seedstock operation in which customer’s calves are bought back and finished at the ranch near Kimball, Minnesota.  Schiefelbein, marketing fat cattle on the grid, has the opportunity to buy his bull customer’s calves at a premium as “we are able to sell those cattle on a grid-based system that gives us rewards for cattle that are better than average.”

“If you were going to all the sudden mandate that half my cattle be sold on a cash-based average merit value, I’m going backwards,” he said.

 

Old Stockyard Days…

 

Wall said when marketing feeder cattle on a cash basis, competition yields premiums for higher-quality calves.  He suggested that the same should be able to happen should 50 percent of fat cattle be traded on the spot market each week as well.

“Let’s say you bring some premium quality feeder cattle into PAYS and those cattle are all black, they’re peas in a pod, they’ve got an honest condition, honest weigh up on them, then a guy is going to give top dollar for them,” Wall explained.  “If those cattle qualify for some value-added programs like NHTC or all-natural, they’re going to give more for them.  Why can’t that happen in fat cattle?  Why wouldn’t they come out and bid up the cattle that qualify for programs or the cattle that are top quality?”

Today, Wall suggested, packer buyers simply work off feedlot print outs showing days on feed and final weights rather than analyzing the live cattle.

“We didn’t realize how good we had it back in the old stockyard days when your buyers walked out on bricks in the alleys and looked at the cattle and knew what good ones were supposed to look like.  We just don’t have that anymore,” Wall said.

Thinking of the same age of marketing, Schiefelbein said an entire pen of cattle, “the good, the bad, and the ugly” all sell based on an average.  He said formula and grid-based marketing needs to remain intact.

 

Reengage in Negotiation…

 

“The focus is not cash trade, but how we can increase negotiated trade,” Schiefelbein said.  “There needs to be, what I like to call, new rules of engagement for negotiating base starting prices for grids and formulas because that’s where the weakness in the system is.  We have all these grids and formulas that are relying on this small cash trade to decide what the prices are for them.”

Schiefelbein said the industry needs to work on developing a mechanism “independent of that little bit of cash trade” to set a base price for cattle merchandised on a grid or formula system.  He suggested that feeders need to become more active in “aggressively negotiating” base prices for trade each week.

Last week, for example, Schiefelbein said he worked through an “unheard of” circumstance in which he sold cattle to five different packers.  The packers gave him a starting price for the grids and he negotiated a base price with each individual packer, or “bid the grid, if you will.”

“It’s going to require our industry to reengage with negotiated trade,” Schiefelbein said.  “We have to begin negotiating our cattle ourselves for the number of head we are merchandising, not letting somebody else determine that price for us.  Every animal should be negotiated a price with whether it goes on a grid or whether it’s an average price cash trade number.  Our industry should understand that price discovery is so important that we need to reengage in price discovery and every head should have a negotiated start price to it.”

 

When To Best Act…

 

Schiefelbein’s “new rules of engagement” would ideally be self-regulated and would require initiative and effort from the entire industry.  To him and NCBA, government mandates are concerning.

“I think the idea behind this whole 30 or 50 percent trade is good.  They understand price discovery is broken and negotiated trade needs to reoccur, but I tell you what, red flags should go up and concerns should be raised if they believe the fix to our marketing system involves the term mandatory and government in the same sentence,” Schiefelbein said.

Remembering that roofs aren’t usually best fixed in the midst of the storm, Schiefelbein said NCBA plans to oppose the bill and hopes to have an industry-wide conversation on a better long-term solution on how to “reengage cattle feeders each week in price discovery.”

“Let’s not be in a haste to make a quick fix decision that, a year down the road, we’re going to say, ‘what were we thinking when we decided government and mandatory was the right solution for our industry?’  We want to put more thought into it.  Let’s not rush into lots of different things at a time when our industry is battling this ongogin COVID crisis.  Let’s be thoughtful about it, let’s be logical about it, and let’s be discerning about it,” Schiefelbein said.

But Wall explained that there is a sense of urgency not only because of the attention lawmakers are giving the cattle markets, but also because reauthorization of Mandatory Price Reporting is coming up in September.  The mandate would be included in the reauthorization should it pass, and Wall is hopeful that it will.

“I’ll tell you what, it’s getting a lot of support and the greatest thing is it’s already a bipartisan bill.  We’ve got two major Democrats on there so we’re not going to get any backlash there.  In the atmosphere we’re in right now, where so much of your population is becoming more aware of where their meat comes from and now that the sticker shock is laying in from these gouging dressed beef prices that your packers have put forward, the timing to get something like this done has never been better,” Wall said.

The bill is currently cosponsored by Senators Joni Ernst (R-IA), Steve Daines (R-MT), Mike Rounds (R-SD), Tina Smith (D-MN), and Cindy Hyde-Smith (R-MS).  United States Cattlemen’s Association and R-CALF USA have offered their support for the bill as well.

 

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