Limiting the use of Alternative Marketing Agreements in the fed cattle industry could cost the cattle and beef industries $2.5 billion in the first year and $16 billion over the first 10 years, said a well-known university economist last week in a white paper on the subject.
Stephen Koontz, agricultural economist at Colorado State University, said the white paper was “to offer a research perspective on the 30/14 and 50/14 proposals that have been circulating.”
The 30/14 and 50/14 monikers reference proposals that mandate beef packers buy 30% or 50% of their daily or weekly cattle slaughter through negotiated, open-market transactions and move them to slaughter within 14 days, Koontz said. The 50/14 proposal could have the worst effect with the 30/14 costs “likely halved.”
Currently, a little less than 70% of cattle marketings are through some type of formula method, of which there are many, Koontz said. About 10% are forward contracted for delivery 30 or more days in the future, leaving about 20% that is done through a negotiated cash market, and about 2% that uses a negotiated grid.
COUNT THE COSTS
There are bills being introduced in the US Congress that would mandate those levels of negotiated purchases, and they are supported by some ranching groups, but “there are almost no benefits and considerable costs due to lost efficiency and product quality,” Koontz said. Alternative Marketing Agreements, however, “have considerable benefits and almost no costs.”
For the cattle and beef industries, the costs are incurred ultimately by cow/calf producers and beef consumers, he said. And “the distribution of impact could be called egregious.”
The main cost to the cattle and beef industries of AME use is the potential for beef packers to exercise market power, Koontz said. The main benefit to the cattle and beef industries for AMA use is the ability of feeding and processing facilities to operate more efficiently and provide higher quality beef products to consumers.
That market-power-versus-efficiency question often is the bottom line in many policy discussions among producer groups, industry groups and policy makers, he said. The quandary is: “will legislation that limits or prohibits the use of AMAs result in a net benefit of net cost to the cattle and beef industry.”
A second main cost to the cattle and beef industries of AMA use is the potential detrimental effect on the quality of price discovery, Koontz said. It’s important to note that improving the quality of price discovery does not really change supply and demand and will therefore not change the costs and benefits.
A 2007 government study into AMA use found that they are used because they reduce costs, improve efficiency and improve product quality, he said. The study found such benefits at feedlots and at packing plants. Higher quality cattle, which garner price premiums resulted from AMA use, along with higher boxed beef cutout values, higher futures prices and higher prior-week cash prices all result in higher transaction prices.
CATTLE, BEEF RECAP
Fed cattle trading was reported this week at $115 to $120 per cwt on a live basis, steady to down $2 from last week, and at $180 to $190 on a dressed basis, steady to up $5.
The USDA choice cutout Wednesday was down $7.72 per cwt at $377.77, while select was off $9.82 at $350.20. The choice/select spread widened to $27.57 from $25.47 with 115 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Tuesday was $126.11 per cwt, down $0.33. This compares with Wednesday’s Aug contract settlement of $134.02, up $0.72.