Cash and alternative cattle markets explained
There are many moving parts on the fed cattle market, including trade between feedyards and packers, and sometimes it raises questions on how these trades impact cow/calf producers.
In the Jan. 22 Kansas State University (KSU) Beef Cattle Institute (BCI) Cattle Chat podcast, KSU Economist Dustin Pendell explains fed cattle trade both on and off the cash market.
“Cash prices is one form of trade between packers and feedyards,” says Pendell. “The terms ‘cash market’ and ‘spot market’ mean the same thing – the transaction happens immediately or on-the-spot.”
Pendell notes alternative marketing arrangements (AMAs) could include forward contracts or marketing agreements such as marketing on the grid or other formulas. Packer ownership is another form of marketing, he explains.
“Around 20 percent of all trades are on the cash market, and the other 80 percent of trades are made through AMAs,” says Pendell. “Cattle producers care about these numbers because formulas in AMAs are referencing some sort of base cash price.”
“The formula prices are based on cattle characteristics regarding quality, and price incentives and discounts are applied to the base price, which is often determined from the cash price,” he explains.
Transition from cash market
Throughout the last year, Pendell shares he has seen upwards of 30 percent of the cattle marketed sold on the cash market, leaving the majority sold through AMAs.
“Overtime, we have switched from a cash market to AMAs, and the reason is AMAs save time and transaction costs,” he continues. “There has been research done that use of AMAs saves anywhere from $15 to $40 per head over the cash market. This is one of the major reasons we have seen the industry switch from cash marketing to alternative marketing.”
Switching back to marketing a majority of cattle on the cash basis could increase transaction costs, according to Pendell.
“As time evolved and as we moved from a high percent of cattle sold on a negotiated spot market to fewer and fewer, the question that comes up is price discovery,” notes BCI Veterinarian Bob Larson. “Those in the industry could question if we are doing a good job putting a value on cattle and how much on-the-spot negotiation is necessary to have good price discovery and transparency.”
Pendell shares it is a complex issue, which could be taken from multiple angles.
“Although it has been proposed there should be a set amount of cattle traded on the cash market for price discovery and transparency, it is all voluntary,” he notes. “It is hard to enforce voluntary marketing without mandating participation through legislation and ultimately adding additional costs to the system.”
“There are many tradeoffs we need to keep in mind as we think through making changes to cattle marketing strategies,” he concludes.
Averi Hales is the editor of the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.