Have Your Beef And Eat It Too
DR. ANDREW P. GRIFFITH
KNOXVILLE, TENN.
There is an old saying, “You cannot have your cake and eat it too.” However, there seems to be a lot of people that do not understand this. Based on observation, it seems there is a large percentage of people in the United States who want the government to assist them in endeavors that would help them, but then those same people complain when the government meddles or interferes in other aspects of their business.
These comments are in reference to price discovery in the finished cattle market. There are cattle producers and legislators advocating a mandate by the government to require packers to source a certain percentage of their cattle purchases through the negotiated cash market. The reason for this is because the quantity of cattle trading on the negotiated cash market has declined dramatically the past couple of decades resulting in a hole in price discovery. There are likely several reasons packers and feedlots have reduced the use of negotiated cash trade, but the primary reason for less negotiated trade is the reduced cost offered by alternative marketing arrangements to both packers and feedlot managers.
If legislation were to be passed mandating packers to purchase a certain percentage of their cattle through a negotiated pricing system then it could have unintended consequences. The first would be that this mandate also impacts feedlot owners. Feedlot owners will have to participate in this method of trade which may not be in each one’s best interest. Thus, while the mandate is directed toward the beef packing industry, it will also have direct impacts on cattle feeders. Additionally, the lack of negotiated pricing tends to be regional. The quantity of negotiated finished cattle trade tends to be sufficient in Nebraska and Iowa and practically nonexistent in Texas. The cattle being finished in Texas do not tend to mirror the cattle being finished in Nebraska or Iowa, which means the negotiated price in those states may not reflect what Texas cattle prices should be.
In conjunction with price discovery, the proponents of a legislative mandate seem to think it will increase the price of finished cattle. However, these same people fail to consider that a mandate will not change supply and demand of beef or finished cattle which means prices will not increase with the mandate. All the mandate will do is change the method of how some cattle are traded and increase transaction costs. This will likely mean a lower return to cattle feeders which is an unintended consequence.
This article is not going to offer any solutions as it relates to increasing negotiated cattle trade, because the market participants should determine how they do business. Would an increase in negotiated cash trade be beneficial? It certainly would be beneficial from a price transparency point. Is negotiated cash trade necessary? The simple answer is yes. The reason the answer is yes is because most alternative marketing arrangements use the negotiated price in the pricing structure. Thus, the disappearance of negotiated trade leaves a hole in the formula which means supply and demand are not being fully considered.
To make a long conversation short, there is a legitimate need for negotiated cash cattle trade, but a mandate is not the correct method of achieving the goal of price transparency. Packers and cattle feeders alike are operating businesses, and the decision makers for these entities should know how to make decisions that are best for their operations bottom line and long-term survivability. These groups will find a solution voluntarily if things get bad enough. The problem lies in a mandate. Today it is legislation mandating someone else to do something they do not want to do and the next day it is legislation mandating you to do something you do not want to do. “You cannot have your beef and eat it too.” ∆
DR. ANDREW P. GRIFFITH: Assistant Professor, Department of Agricultural and Resource Economics, University of Tennessee