Gate Cuts

Paul Walker, DI Walker Consulting

More On Cutout Value: Live Cash Price Ratio

In my last Gate Cuts article, I introduced you to the concept of the cut-out value ($cwt) to live cash price ($:cwt) ratio. In an August 2021 Drovers article, Greg Henderson captured part of the problem, “the predominance of alternative marketing agreements (AMA) in 2020 meant that the big four packers (Tyson, Cargill, JBS and National Beef) have much of their (harvest) needs filled well in advance (of the Covid pandemic) reducing their interest in offering cash bids.” Kansas State University economist, Glynn Tonsure, told the U.S. Senate Ag Committee, “perhaps no relationship is currently more relevant than the relationship of fed cattle inventory to processor capacity.” According to South Dakota Senator, Mike Rounds, “the disparity between wholesale beef prices and live cattle prices hurts both cattle producers and consumers,” source Greg Henderson, Drovers, August 2021. These three issues summarize the current problem the fed cattle industry faces. Consequently, there are calls to increase fed cattle market transparency and the IBA Board of Governors is in the process of developing policy that: 1. Supports a government mandate that packers report the number of cattle, organized by cattle type scheduled for delivery for harvest each day for the next 14 days and that USDA make these reports immediately available for the public. 2. Favors a more robust USDA reporting system that does not misuse confidentiality as a reason for not reporting. 3. Endorses a concept there is a need for expedited reauthorization of the USDA Livestock Mandatory

Reporting program, including base prices subject to the same reporting requirements as negotiated cash, and the creation and maintenance of a library of marketing contracts offered by packers to producers that include educational outreach activities for producers regarding how to utilize the library. Regarding market price discovery, IBA: • Does not support a government mandate that establishes either national or regional minimums of negotiated cash trades by packers to achieve price discovery. • Supports the concept of conducting a national study to investigate the feasibility of a government mandate for cattle market price discovery that establishes a live cash cattle price for low choice, yield grade 3.9 cattle, based on a maximum direct ratio of cutout value ($:cwt) to live cash cattle price ($:cwt).

Setting the daily base live cattle ($:cwt) price for low choice, yield grade 3.9 cattle according to a maximum ratio using the previous days cutout value ($:cwt) makes several improvements in market price discovery for finished cattle producers. These advantages include: • Allowing producers to capture a share of the cutout value as consumer demand for beef increases. • Maintaining the ability of cattle feeders and packers to utilize alternative marketing agreements. • Maintaining current premiums for superior cattle (CAB, prime, yield grade 2, etc.) and discounts for alternative cattle (yield grade 4, lower quality grade cattle, etc.). • Allowing packers and cattle feeders both to share in increased income as consumer demand increases. • Establishing a market system that is flexible and fair for both the packer and the feeder.

Setting a maximum cutout value to live cash price ratio means the ratio could go lower but never higher, thereby allowing producers to receive a larger proportion of the consumer dollar but never allowing the packers to receive a higher proportion of the consumer dollar at the feeder’s detriment. As the cutout value goes up or down, the percentage share can remain stable or may shift to the feeder’s favor (a lower ratio).

An obvious disadvantage of a cutout value: live cash cattle price ratio is that as consumer demand for beef decreases the producer will share in decreased revenue (lower $:cwt for live, low choice, 3.9 yield grade cattle) as the cutout value ($:cwt) decreases. Of course, the feeder already shares in any such decrease as the packer generally decreases the price offered for live cattle as the cutout value declines.

The table included in this article shows the daily cutout value and live cash cattle price from April 16 to August 20, 2021. The cutout value and live cash price represents the high prices reported each day as opposed to the average daily values, simply because the average prices are not available from the USDA daily. In actuality the live cash price average is lower than the reported daily high, thereby, raising the calculated ratio shown in column 4. A higher ratio means the producer gets a lower percentage of the consumer dollar spent on beef. Column 5 calculates the live cash price for finished cattle if the ratio were preset at 2.05:1 for the respective actual beef cutout values reported in column 2. Following the Covid Black Swan event of 2020, the average beef cutout value to live cattle cash price ratio from October 2020 to March 2021 was 2.05:1; before the third Black Swan event that began in April 2021 and continues through the time of this publication. Unless the ratios we are currently observing begin to decline soon, I am beginning to believe the normality of the ratio of cutout value to live cash price is above 2.20:1 and the change in ratios we are observing is not a third Black Swan event.

Column 6 shows the calculated unrealized income for each 1350-pound steer producers could have received if the ratio would have been preset at 2.05:1 as opposed to what it really was as reported in column 4. The unrealized income per steer is calculated by subtracting the figures ($:cwt) in column 3 from the $:cwt in column 5 and multiplying the difference times 13.5 (the number of hundred weights in a 1350 pound steer). Since April 16, producers have lost out on an average of $337.96 for every 1350-pound steer sold via live cash.

As some people suggest, mandating that the four largest packers purchase a minimum percent of their respective daily harvest in the cash market will not affect the ratio and concurrently will not increase the revenue the feeder receives. Mandating a maximum cutout value to live cash price ratio will allow the packers and feeders to share proportionately in the increase/decrease in consumer beef demand and will maintain the feeder’s and packer’s right to utilize their choice of alternative marketing agreements.

TABLE 1: RATIO OF BEEF CUTOUT PRICE TO LIVE CATTLE CASH PRICE SPRING 2021 SOURCE: PAUL WALKER TAKEN FROM IOWA FARMER TODAY FARM COMMODITY NEWSLETTER

BEEF CUTOUT LIVE CASH PRICE LIVE CASH UN-REALIZED INCOME DATE VALUE HIGH ($:CWT) HIGH ($:CWT) RATIO ($:CWT) AT 2:05:1 ($:HD AT 1350#)

4/16/2021 276.05 125.00 2.21:1 134.66 130.41 4/19/2021 276.16 123.04 2.24:1 134.71 157.54 4/20/2021 278.26 120.00 2.32:1 135.74 212.49 4/21/2021 280.46 123.00 2.28:1 136.81 186.44 4/22/2021 282.31 123.00 2.30:1 137.71 198.59 4/23/2021 283.77 122.00 2.33:1 138.42 221.67 4/26/2021 285.2 120.00 2.38:1 139.12 258.12 4/27/2021 290.99 119.00 2.43:1 141.95 309.83 4/28/2021 292.5 119.50 2.45:1 142.68 312.93 4/29/2021 293.76 119.57 2.46:1 143.3 320.36 4/30/2021 296.5 119.00 2.49:1 144.63 346.01 5/3/2021 299.3 119.00 2.51:1 146 364.5 5/4/2021 301.22 118.00 2.55:1 146.94 390.69 5/5/2021 304.78 118.00 2.58:1 148.67 414.05 5/6/2021 306.37 118.00 2.60:1 149.45 424.58 5/7/2021 305.88 118.20 2.59:1 149.21 418.64 5/10/2021 309.11 120.00 2.58:1 150.79 415.67 5/11/2021 312.37 121.00 2.58:1 152.38 423.63 5/12/2021 315.08 121.00 2.60:1 153.7 441.45 5/13/2021 316.78 120.00 2.64:1 154.53 466.16 5/14/2021 316.94 122.00 2.60:1 154.61 440.24 5/17/2021 319.62 120.00 2.66:1 155.91 484.79 5/18/2021 323.34 121.00 2.67:1 157.73 495.86 5/19/2021 323.38 121.25 2.67:1 157.75 492.75 5/20/2021 324.18 121.15 2.68:1 158.14 499.37 5/21/2021 325.17 120.00 2.71:1 158.62 521.37 5/24/2021 327.83 120.00 2.73:1 159.92 538.92 5/25/2021 329.92 121.00 2.73:1 160.94 539.19 5/26/2021 329.49 121.00 2.75:1 160.73 536.36 5/27/2021 329.98 122.00 2.71:1 160.97 526.1 5/28/2021 330.97 117.00 2.83:1 161.45 600.08 6/1/2021 334.56 - - -- 163.2 -6/2/2021 340.16 122.50 2.78:1 165.93 586.31 6/3/2021 340.55 121.00 2.81:1 166.12 609.12 6/4/2021 338.98 120.50 2.81:1 165.36 605.61 6/7/2021 338.6 120.00 2.82:1 165.17 609.8 6/8/2021 338.61 120.03 2.82:1 165.18 609.53 6/9/2021 338.65 122.50 2.77:1 165.2 576.45 6/10/2021 338.25 121.00 2.80:1 165 594 6/11/2021 337.56 121.89 2.77:1 164.66 590.9

BEEF CUTOUT LIVE CASH PRICE LIVE CASH UN-REALIZED INCOME DATE VALUE HIGH ($:CWT) HIGH ($:CWT) RATIO ($:CWT) AT 2:05:1 ($:HD AT 1350#)

6/14/2021 335.47 124.00 2.71:1 163.64 535.14 6/15/2021 334.43 123.48 2.71:1 163.14 535.41 6/16/2021 329.17 125.00 2.63:1 160.57 480.2 6/17/2021 326.25 125.00 2.61:1 159.15 460.89 6/18/2021 323.28 124.00 2.61:1 157.7 454.95 6/21/2021 321.2 126.39 2.54:1 156.68 408.92 6/22/2021 315.75 126.50 2.50:1 154.02 371.52 6/23/2021 312.05 126.00 2.48:1 152.22 353.97 6/24/2021 307.42 125.66 2.45:1 149.96 328.05 6/25/2021 304.56 125.60 2.43:1 148.57 310.1 6/28/2021 297.43 126.50 2.35:1 145.09 250.97 6/29/2021 292.34 126.50 2.31:1 142.61 217.49 6/30/2021 291.29 126.50 2.30:1 142.09 210.47 7/1/2021 287.65 126.50 2.27:1 140.32 186.57 7/2/2021 285.44 126.00 2.27:1 139.24 178.74 7/6/2021 286.68 - - -- 139.84 -7/7/2021 284.9 126.50 2.25:1 138.97 168.35 7/8/2021 281.97 125.34 2.25:1 137.55 164.84 7/9/2021 278.59 126.00 2.21:1 135.9 133.65 7/12/2021 275 125.00 2.20:1 134.15 123.53 7/13/2021 273.34 124.55 2.20:1 133.34 118.67 7/14/2021 272.88 124.00 2.20:1 133.11 122.99 7/15/2021 269.87 124.00 2.18:1 131.64 103.14 7/16/2021 267.94 126.00 2.13:1 130.7 63.45 7/19/2021 266.49 122.00 2.18:1 130 108 7/20/2021 264.88 - - -- 129.21 -7/21/2021 265.24 122.78 2.16:1 129.39 89.24 7/22/2021 266.14 125.25 2.13:1 129.82 61.7 7/23/2021 266.63 124.50 2.14:1 130.06 75.06 7/26/2021 267.93 123.00 2.18:1 130.7 103.95 7/27/2021 269.73 124.52 2.17:1 131.58 95.31 7/28/2021 273.16 123.00 2.22:1 133.25 138.38 7/29/2021 275.22 124.00 2.22:1 134.25 138.38 7/30/2021 278.46 126.00 2.21:1 135.8 132.71 8/2/2021 281 125.00 2.25:1 137.07 162.95 8/3/2021 285.84 125.00 2.29:1 139.43 194.81 8/4/2021 289.34 125.00 2.31:1 141.14 217.89 8/5/2021 292.58 126.00 2.32:1 142.72 225.72 8/6/2021 296.25 127.21 2.33:1 144.51 233.55 8/9/2021 299.8 125.00 2.40:1 146.24 286.74 8/10/2021 305.32 127.00 2.40:1 148.94 296.19 8/11/2021 310.8 126.00 2.47:1 151.61 345.74 8/12/2021 317.93 126.00 2.52:1 155.09 392.72 8/13/2021 324.83 126.46 2.57:1 158.45 431.87 8/16/2021 329.8 128.75 2.56:1 160.88 433.76 8/17/2021 338.06 127.00 2.69:1 164.91 511.79 8/18/2021 340.08 126.52 2.69:1 165.89 531.5 8/19/2021 341.63 129.50 2.64:1 166.65 501.53 8/20/2021 345.06 128.86 2.68:1 168.32 532.71