A report by the Agricultural and Food and Policy Center (AFPC) at Texas A&M University provides an assessment of the proposed Cattle Price Discovery and Transparency Act of 2021 and its potential impact on segments of the beef and cattle supply chain.
The report presents the expected effects in a matrix format, highlighting the anticipated directional impact of each portion of the bill on a set of stakeholder groups and market outcomes, including cattle and beef prices, market transparency, price discovery and data confidentiality.
“The bill proposes to establish a regional mandatory minimum threshold for the percentage of cattle purchased under negotiated grid or negotiated pricing terms,” Texas A&M AgriLife Extension Service Economist Dr. Justin Benavidez said. “It also proposes the establishment of a cattle contract library and to expand reporting requirements for cattle pricing and slaughter.”
The bill establishes regional mandatory minimum thresholds of negotiated cash and negotiated grid trades based on a region’s 18-month average trade. The National Cattleman’s Beef Association (NCBA) voiced concern with the negotiated minimums portion of the bill, as did Texas Farm Bureau (TFB) and the American Farm Bureau Federation (AFBF).
TFB passed a resolution at the annual meeting in December 2021 that opposed government mandates that force any livestock slaughter facility to purchase a set percentage of their live animal supply via cash bids.
The resolution passed at the AFBF annual meeting in January, and similar language was approved by NCBA in early February.
To determine if the minimum and maximum bounds of the bill as proposed impose an economic cost to the cattle market, the authors established an unrestricted forecast of negotiated trade for various cattle- producing regions—Texas-Oklahoma, New Mexico, Kansas, Nebraska and Iowa-Minnesota.
In each region, they modeled expected negotiated trade as a function of: the trend in negotiated trade, whether the cattle cycle year saw an increase or decrease in herd size, seasonality of historic negotiated trade, total weekly fed cattle trade and the previous week’s negotiated trade volume.
The criteria also included a dummy variable accounting for the introduction of the industry-led “75% Plan.”
“The difference in the expected amount of unrestricted negotiated trade and the amount of negotiated trade compelled by Senate Bill 3229 provides a measure of the cost of the bill’s negotiated trade provisions,” Benavidez said.
The report contains figures showing the expected unrestricted negotiated trade plotted against the negotiated trade minimums compelled by the bill through December 2026, a five-year outlook.
The authors addressed whether changes in negotiated volume would have a cost.
“Typically, a move away from alternative marketing arrangements or AMAs results in lost efficiency,” AgriLife Extension Economist Dr. David Anderson said. “This efficiency loss translates directly into increasing the transaction cost of buying and selling cattle.”
Anderson said industry research also shows packers that operate with AMAs tend to have lower marketing costs.
“Reliability of supply is a critical component in operating a large packing plant, and industry research has shown plants with higher AMA volumes have more stable average monthly volumes,” he said. “And the increased costs from a mandated reduction in AMA use would be shouldered by the cattle feeding sector.”
Benavidez noted the report also shows the region that includes Texas would see the greatest negative impact from the imposition of mandatory trade minimums.
The authors of the report concluded negotiated trade mandates are expected to have negative effects on short-term cattle and calf prices.
“Negotiated trade mandates do provide additional price discovery and market transparency, but more price discovery does not mean that cattle prices will be higher,” Benavidez said. “The mandate will result in lower short-term fed cattle prices due to the increase in the costs of the feeder-packer cattle sale transaction.”
The bill does increase price discovery, but at the cost of lower prices to producer and higher prices to beef consumers, Benavidez said.
“In overall terms of the bill’s impact on various segments of the beef and cattle supply chain, the bottom line is that there would be tradeoffs,” AFPC Co-Director Dr. Bart Fischer said. “While it may be able to achieve greater price discovery and market transparency, forcing the movement away from AMAs via regional mandatory minimums for negotiated purchases will result in lower cattle prices and higher wholesale and retail beef prices.”