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GAO releases findings on cattle market volatilityGAO releases findings on cattle market volatility

Agency makes two recommendations to USDA for improved transparency.

Krissa Welshans 1

April 11, 2018

6 Min Read
GAO releases findings on cattle market volatility

In early 2016, the Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF USA) submitted a formal request to the U.S. Senate Judiciary Committee for an investigation into the late-2015 collapse in cattle prices of 15.1%, which it said dropped further and faster than during any time in history.

As a result, the committee commissioned a Government Accountability Office (GAO) analysis to assess the cause of increased cattle market volatility, including a review of the structure of the market and of any possible anti-competitive conduct.

After two years, findings of the GAO report were released this week, and they suggest that the price changes were caused by supply and demand factors — not industry consolidation.

GAO noted that a drought from late 2010 to early 2013 affected feed prices and led to cattle inventory adjustments that ultimately influenced prices of fed cattle from 2013 to 2016.

“The domestic cattle inventory decreased from about 96.5 million in 2007 to about 88.5 million in 2014. This decrease in inventory reduced the supply of fed cattle available for sale in 2013 and 2014, which could have driven up prices for fed cattle,” GAO explained. “As the drought eased in late 2013, it became more feasible to feed herds on forage, creating incentives for cow/calf operators to expand their herds throughout 2014 and 2015. This increased the number of fed cattle sold for slaughter by late 2015, and prices began to drop at that time.”

Additionally, GAO pointed out that increased competition from cheaper meat proteins, such as pork, also contributed to the price decline.

As for concerns about the impact of increased industry consolidation, GAO said its analysis of cattle market data from the U.S. Department of Agriculture indicated that competition levels among packers that slaughter and process fed cattle did not appear to affect the national price changes in the fed cattle market in 2015. However, it did note that areas of the country with less competition among packers did have lower cattle prices.

The Packers & Stockyards Program (P&SP) found that packers may have benefited for a short period as the prices they paid for fed cattle decreased more quickly than the prices they received for boxed beef, but it also found that those price differences quickly diminished to smaller levels than before the price drop.

“The results of our analysis suggest that some packers may have been able to exercise market power in areas with less competition. Evidence of this effect alone does not imply that packers engaged in anticompetitive or improper behavior,” the report noted.

Another area of concern has been the occurrence of volatility and irregularities in the futures markets. GAO reported that a review by the Commodity Futures Trading Commission (CFTC) did not find evidence of irregularities in the futures market for fed cattle in 2015. However, GAO said CFTC and others have expressed concern that certain terms in futures contracts for fed cattle — such as the quality of beef represented in the contract — did not sufficiently mirror the specifics of the fed cattle market, which could make them less useful to cattle market participants for hedging risk. These concerns have resulted in some changes.

For example, GAO said stakeholders have expressed concern that the beef quality specifications in futures contracts for fed cattle are lower than the beef quality produced by animals traded in the fed cattle market. As such, this difference may decrease the value of those futures contracts. Additionally, stakeholders expressed concern that this difference can negatively affect whether prices in the futures and fed cattle markets effectively converge as expected.

In response to these concerns, the Chicago Mercantile Exchange (CME) increased the quality percentage to 60% for beef that's Choice or better starting with the October 2017 futures contracts and to 65% starting with October 2018 futures contracts.

CME also has revised its delivery process and expanded the time frame for making deliveries, which GAO said allows it to add locations where cattle can be delivered to satisfy a futures contract. According to CFTC, the change made delivery more accessible and improved the connection between the fed cattle and futures markets.

“CFTC officials said that they believe the changes have the potential to strengthen the performance of the futures market for fed cattle as a risk management and price discovery tool but will continue to monitor the effectiveness of the changes,” GAO said.

Information sharing

According to the report, P&SP carries out its oversight responsibilities through monitoring and investigations. While the price reporting group, housed within the Agricultural Marketing Service (AMS), collects extensive data on transactions between packers and feeders via livestock mandatory price reporting, as required by law, it does not regularly share these data with P&SP. As such, the data are not available for P&SP to use for regular monitoring activities to flag potential issues for investigation.

USDA officials told the GAO that P&SP officials may request and receive only specific portions of price reporting data based on individual investigations it has already decided to conduct. For example, P&SP was able to analyze price reporting data when it was investigating the 2015 price drop.

P&SP officials expressed to GAO that regular access to price reporting data would allow them to more routinely conduct analyses as part of their routine market monitoring activities.

“Specifically, the officials said that, going forward, price reporting data could be used to detect price outliers more quickly and help P&SP identify potential anticompetitive behavior; for example, where buyers might agree to take turns buying cattle at different times so as to avoid competing with one another,” GAO noted.

Two recommendations

In response to the findings, GAO made two recommendations. The first recommendation was that USDA review the extent to which, under statute, the price reporting group can share daily transaction data with P&SP and that, if USDA determines that the statute does not permit such sharing and it is advisable, submit to Congress a proposal to allow such sharing.

GAO said USDA took action by reviewing the authority provided by the Livestock Mandatory Reporting Act of 1999 and determined that the act does not allow for data sharing for routine monitoring purposes. However, USDA told GAO that the agency believes considering a statutory amendment to allow for routine data sharing is not advisable due to the agency’s concerns about maintaining public trust in USDA’s administration of the Livestock Mandatory Reporting program.

The second recommendation was for the secretary of agriculture to direct the AMS administrator to ensure that P&SP routinely conducts in-depth analyses of the transaction data it collects. Such analyses could include, but not be limited to, examining competition levels in different areas of the country, GAO said.

“Concerning our second recommendation, USDA agreed that routine, in-depth analysis of packer transaction data would enhance USDA’s monitoring of the fed cattle market to ensure against discriminatory or anticompetitive practices. USDA stated that it plans to create a new competition branch in P&SP — now known as the Packers & Stockyards Division — that will be staffed by employees with economic expertise,” the report explained.

Further, USDA told GAO that the new branch will be responsible for reviewing the transaction data P&SP receives from packers and conducting in-depth analyses that would help the agency monitor changes in competition and prices over time to inform USDA decisions on where to direct its resources.

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