Cattle Industry Misses Price Discovery Targets from 75% Plan in the First Quarter of 2021Wed, 28 Apr 2021 10:10:23 CDT
Dr. Justin Benavidez of Texas Agrilife has posted on the results of the first quarter cattle industry 75% plan. Benavidez says the high points to remember about the 75% plan are
The goal of the 75% plan is to increase frequent and transparent negotiated trade to regionally sufficient level, to achieve robust price discovery
Robust negotiated trade volumes are defined by work form Dr. Stephen Koontz
Trade in a given region must meet 75% of the robust negotiated volumes 10 weeks out of 13 in a given quarter
Failure to meet the specified levels constitutes a minor trigger
Three minor triggers constitute a major trigger
Two major triggers in a set of four rolling quarters dictate action from NCBA to support legislative changes to fed cattle marketing
To have a chance to see his graphs- click or tap here to jump to the complete post by Dr. Benavidez.
According to his post, there were multiple weeks in which negotiated trade volumes did not meet the minimums of the 75% plan. TX-OK-NM failed 4/13 weeks, Kansas failed 6/13 weeks, NE-CO failed 2/13 weeks, and IA-MN did not fail any weeks.
Keep in mind that highlighted values do not account for weeks in which force majeure was invoked. Winter storm Uri and plant maintenance in Kansas each led to certain weeks (not necessarily failing weeks) qualifying for force majeure exclusion.
Next, Benavidez looked at weeks in which negotiated trade volumes did meet the volume to establish robust price discovery. In the same quarter last year TX-OK-NM only traded a negotiated volume necessary for robust price discovery once. NE-OK only traded a negotiated volume necessary for robust price discovery twice. Kansas traded negotiated volume necessary for robust price discovery six weeks in 2020, and fell to only three weeks in 2021.
Then Dr. Benavidez highlighted values for weeks in which negotiated trade volumes did meet the minimum volume necessary to establish price discovery. One of the biggest takeaways from my review of this data is that in all regions but Kansas, and during one week in Nebraska, minimum volumes to establish price discovery were achieved.
First Quarter Takeaways
I’ve had several discussions with colleagues and producers about what the results of the first quarter really mean over the past few weeks. I think a lot of people take the top-line results of the failure to meet the established thresholds and consider these voluntary efforts to be a failure. It is evident that by the measures of the 75% plan, a major trigger was tripped. However, I won’t be quick to call the results of Q1 an outright failure.
First, when compared to Q1 2020 negotiated trade volumes, negotiated trade in Q1 2021 increased substantially. Were the 75% plan in place in 2020, in 10 of 13 weeks TX-OK-NM negotiated trade volumes would’ve failed the 75% plan. In 3 of 13 weeks Kansas negotiated trade volumes would’ve failed the 75% plan. In NE-CO 5 of 13 weeks would’ve failed the 75% plan. Negotiated trade in TX-OK-NM in Q1 2021 rose substantially, both in total negotiated head traded and in weeks passing the 75% plan, over Q1 2020. In fact, the TX-OK-NM region traded almost 55,000 more negotiated cattle in Q1 2021 than in Q1 2020. Negotiated trade is up substantially in NE-CO too. Challenges remain in Kansas, where total negotiated volume fell by almost 36,000 head.
I’d like to make a note for the sake of transparency. The first quarter of 2021 includes the onset of the COVID-19 pandemic, which induced severe market disruptions. Because of these disruptions, I struggled with choosing to compare 2021 and 2020 as a benchmark. I chose to leave 2020 as the previous year for comparison given that COVID-19 was one of the forces which led to the 75% plan.
Second, negotiated trade is up over the previous five-year average across the southern plains. Comparing given weeks across years negotiated trade was, on average, 1.4 times the 2016-2020 average in TX-OK-NM. In Kansas in Q1 2021, negotiated trade was, on average, 1.2 times the 2016-2020 average in a given week. In the regions in which negotiated trade was the most poor, conditions are improving.
Third, the proximity of misses to makes is worth noting. The old saying goes something like ‘close’ only counts in horseshoes and hand grenades. However, we’re discussing policy which can be messier than either of those things under the wrong circumstances, and the 75% rule is designed to increase negotiated trade. Two failing weeks in TX-OK-NM only fell short by a few hundred head. Three failing weeks in Kansas fell short by less than 1,000 head. Of these five ‘close’ weeks across the southern plains in 2021, four still saw higher negotiated trade volumes than in 2020, despite failing the 75% rule.
Lastly, though the NCBA goal is “to increase frequent and transparent negotiated trade to regionally sufficient level, to achieve robust price discovery” the minimum volumes are worth consideration. In Q1 20201 in TX-OK-NM the minimum negotiated volume to achieve price discovery (6,000 head) was met every week. In Q1 2020, the region fell short of achieving minimum negotiated volumes to achieve price discovery five weeks.
The gains made by cattle feeders are important. I plan to leave final judgement on the 75% plan to later reviews in this rapidly evolving market. Results for Q1 show an industry making strides to achieve negotiated volume to achieve robust price discovery as a result of the voluntary 75% plan. Sometimes feeders are even making changes at the expense of higher prices. I think NCBA’s President, Jerry Bohn, was justified in his wrap up in the report on negotiated trade:
“This quarter, the market fell short of the negotiated trade volumes outlined in our voluntary framework, but that should not overshadow the significant improvements made to price discovery since the framework’s implementation.”
Speaking of the letter that was send by NCBA President Jerry Bohn- here is the complete letter sent to NCBA members last week:
March 2021 marked one year since the declaration of a national emergency due to COVID-19. Nobody could have predicted then the serious impact the pandemic would have on our nation, the economy, or within the cattle markets. As states begin the process of fully re-opening, I am hopeful that the worst of this crisis is behind us. Although the business environment for cattle producers has improved since March 2020, the volatility caused by the virus continues to impact our industry.
To improve the business climate for cattle producers, further work is needed in the area of price discovery. Last October, you received a letter from Marty Smith announcing NCBA’s Voluntary Approach to Achieve Price Discovery in the Fed Cattle Market. This framework, sometimes called the “75% Plan,” was developed by NCBA’s Live Cattle Marketing Working Group Regional Triggers Subgroup as directed by the Fed Cattle Price Discovery policy (M 1.10) adopted at our 2020 Summer Business Meeting. As a reminder, the voluntary approach requires the subgroup to analyze the program’s performance at the end of every quarter. The subgroup has completed its evaluation of the first quarter of 2021, and I write today to report their findings to the members of NCBA.
After evaluating the weekly USDA-AMS negotiated trade data in the five major cattle feeding reporting regions, the subgroup has determined that a major trigger was tripped during the first quarter of 2021. According to our member-approved framework, if another major trigger is tripped during any of the remaining quarters this year, NCBA will pursue a legislative or regulatory solution to increase negotiated trade as determined by our membership.
Under the “Negotiated Trade” silo of the 75% Plan, one minor trigger is assigned to each of the regions. The subgroup evaluated the weekly negotiated trade volumes for each cattle feeding region and determined that the Iowa-Minnesota and Nebraska-Colorado regions exceeded their thresholds under the 75% Plan during all of the reporting weeks – therefore, passing their negotiated trade threshold for this quarter. They also found that the Texas-Oklahoma-New Mexico and Kansas regions each fell short of the threshold during five of the Q1 reporting weeks. One of those weeks occurred during Winter Storm Uri and another coincided with mandatory maintenance at a major packing plant which resulted in a lengthy closure. Both events disrupted normal cattle flows and brought critical packing capacity to a grinding halt. The data from the weeks surrounding both events justified invoking the force majeure provisions of our framework, though a major trigger was still tripped due to a lack of packer participation. The subgroup will continue to explore ways to evaluate force majeure events in a more objective manner.
Let me be clear, our producers deserve high praise for their diligent efforts to implement the voluntary framework this past quarter. They offered cattle on a negotiated basis to comply with our framework, even when market signals were telling them to hold on to cattle in anticipation of higher prices. Often, these trades were made at a loss. We recognize the steps cattle producers have taken to address the need for greater price discovery and market transparency, and deeply appreciate their actions. Unfortunately, there was not enough participation in the negotiated market from some of the packers. Simply put, feeders can offer all their cattle on a negotiated basis—but we only achieve our thresholds if there is a buyer willing to bid fairly on those cattle offered.
While the 75% Plan framework calls for the evaluation of a “Packer Participation” silo (in addition to the “Negotiated Trade” silo), this piece of the program is not yet complete, and thus was not evaluated during this quarter. NCBA continues to finalize the details with the four major meatpackers. While we are in the final stages of these negotiations, the basic mechanics have already been established by the subgroup—and we know that, had this silo been evaluated during the first quarter, we would have tripped a major trigger with the packer silo as well.
This quarter, the market fell short of the negotiated trade volumes outlined in our voluntary framework, but that should not overshadow the significant improvements made to price discovery since the framework’s implementation. For example, negotiated trade activity is already up significantly year-over-year in the Texas-Oklahoma-New Mexico region.
It is apparent that the work of NCBA, and the efforts of the producers who have participated in this framework, have been critical in this increase. These gains were made despite residual COVID-19 disruptions, packing plant closures, natural disasters, and a volatile market. Cattlemen and women should be commended for their efforts to bring more price discovery to the marketplace. But we still have a ways to go.
We remain committed to working with all levels of the supply chain to ensure more fed cattle are offered and procured on a negotiated basis. Please do not hesitate to reach out to your NCBA officer team or our staff in Washington, D.C., with any questions or concerns.
Jerry Bohn, NCBA President
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