People in the cattle industry understand that the price of all beef cattle, regardless of their weight, is predicated on the expected future value of the cattle when they are ready for slaughter. Thus, all cattle producers have a vested interest in ensuring that fed cattle are sold into a fully competitive market. Let's look at how the proposed GIPSA (Grain Inspection, Packers and Stockyards Administration) competition rule (the proposed GIPSA rule) will impact the competitiveness of the fed cattle market.
First, a little background: Fed cattle are sold in the cash market either on a live-weight basis, carcass-weight basis, or on a grid-valuation basis (grade and yield). The price received for cattle sold on a live-weight basis becomes the base price for cash cattle sold on a carcass-weight basis, which is based on the animal's dressing percentage, as well as those cash cattle sold on a grid-valuation basis, where grade and yield premiums/discounts are added to or subtracted from the live weight price.
Most fed cattle in the cash cattle market are sold either on a live-weight basis or carcass-weight basis, with only a small volume sold on a grid valuation basis. In fact, the average volume of cattle sold under a negotiated grid in the three major fed cattle marketing regions in 2009 was only about 6 percent.
Collectively, these marketing options are considered the cash market, but it is the live-weight cash market that establishes the base price for all cash market transactions. In addition, the price discovered in the live-weight cash market also establishes the base price for the entire forward pricing market, which includes forward contracts, formula contracts and marketing agreements.
In recent years, feeders have shifted out of the live-weight cash market for various reasons, including: 1) they feared not having timely access to the market (timely access to the slaughtering plant); 2) they were not rewarded for quality; 3) they were not making an adequate profit; 4) they could not get financing without a forward contract; 5) the packers would only purchase under a grid system or a forward-type contract; and, 6) they were concerned that the live-weight cash market was overly prone to manipulation. As a result, the entire cash market has shrunk to below 40 percent.
Because many feeders now avoid the live-weight cash market, the live-weight cash market has become too thin to reflect a competitive price, and the market is becoming increasingly filled with average-quality cattle.
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