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An alternative to cash cattle markets

The cattle market is at a critical crossroads. The rift between producers and packers has been widening, fueled by rising packer margins and declining cattle prices. 

Rabobank senior analyst Don Close says a recent RaboResearch report has compiled data to compare all cattle market transactions on an apples-to-apples basis.  “We put all transaction types on a cash equivalent basis,” he says.  “That enabled us to take the price series of all transaction types on a cash basis, overlay those prices, and the big disparity between the transaction types is not there.”

He tells Brownfield the price imbalance in the cattle markets is driven by the lack of leverage in the industry.  “We simply do not have an adequate amount of slaughter capacity at this time to handle the supply of fed cattle that we have had,” he says.  “And that is what is causing the real imbalance in prices between cutout values and live cattle.”

Close says their research shows slaughter capacity needs to increase between 4,000 and 5,000 head per day.

Close says the current market structure needs to be revitalized.  He suggests an alternative to cash cattle markets, that would derive fed cattle prices from cutout values. Close says by transitioning to a cutout-based pricing foundation, where the industry can continue to advance quality and reward cattle feeders for meeting or exceeding customer expectations.  “If those characteristics become more of the differentiators, we will need to take those characteristics and incorporate them in the price per hundred per cattle on a weekly basis,” he says.  “Opposed to a set dollar fee early in the life of that animal.”

Close says if the industry reverts to selling cattle on an average it will set the industry back 30 years.

AUDIO: Don Close, senior analyst Rabobank