farmgate: For The Cow/Calf Producer, It's "Who Do You Trust?" When It Comes To Price Discovery.
How important are local auction houses in helping you determine the value of your livestock? How important is the futures market in helping you determine the value of your livestock? There are many sources of information, but which receives your greatest reliance? Oh, and by the way, what value do you place on the Mandatory Price Reporting system? Now that you have thought about those questions, let’s see what other producers have to say, and see if you agree with them.
You probably scored local auction houses pretty high on the list of places that help you determine the value of your livestock, unless you think there is something smelly about your local bidders. We’re not going to get into that, but we’ll find out what producers in the Northern Plains told researchers from North and South Dakota State Universities about the trust they place in various price discover channels. Their study, Public Price Reporting, Marketing Channel Selection and Price Discovery: The Perspective of Cow/Calf Producers in the Dakotas, takes a look at the need for reliable information from markets to help cow/calf operators determine livestock values. As you know there has been a decline in the number of terminal markets, along with a decline in the number of folks who are voluntarily reporting local market prices. Those trends resulted in the USDA’s Mandatory Price Reporting (MPR) system.
The cow/calf operators have remained mostly independent of vertical integration in the beef industry. The researchers say USDA has found, “The cow/calf industry is the only segment of the beef industry that has not succumbed to the forces of increased market concentration and vertical integration. In 2005, there were approximately 770,000 beef cow operations in the United States and 85 percent of the beef cow inventory in the United States was located on beef cow operations of less than 500 head.” Over 60% of the calves are sold in local auction markets, 23% in private sales, and 11% in satellite or Internet-based video auctions.
Producers of feeder calves, needing further backgrounding, or stocker calves, ready for the feedlot, placed heaviest emphasis on local prices to determine the value of their animals. “With respect to usage, 98% of producers look to local auction market prices disseminated in the local media as a source of information in their price discovery process. After local auction market information, producers look to local contacts 80%, and quotes from buyers 75%.”
Regarding reliability of the information, producers placed a wide range of trust and distrust among the information sources. “Survey respondents ranked auction market reports in local media outlets to be the most reliable source of information for price discovery, followed by local contacts and satellite auction prices. The source of information considered to be the least reliable was the “other sources,” followed by USDA price reports, fee based information sources, and futures markets. One interesting fact gleaned from the data is that with respect to usage, USDA price reports ranked higher than fee based or futures market, but fee based reports and futures market reports ranked higher than USDA price reports on the reliability scale.”
On the issue of the Mandatory Price Reporting system, various researchers have found that producers have a less than stellar trust in the system; however USDA’s Economics Research Service believes the dissatisfaction results from surveys taken when cattle prices were relatively low. So the Dakota researchers embarked on an initiative to find out from producers in the Northern Plains. “We were surprised to find that the cow/calf operator opinions on mandatory price reporting are not correlated to the herd size, level of education, years of experience, or the membership in beef industry or livestock association…the majority of cow/calf producers in our survey view MPR as having a beneficial effect on the beef industry in general and the cow/calf industry in particular.”
Specifically:
• 34% were undecided if replacing the voluntary price reporting system with mandatory system for the public reporting of slaughter cattle prices had been beneficial to the beef industry.
• 37% were undecided if replacing the voluntary price reporting system with mandatory system for the public reporting of slaughter cattle prices had been beneficial to the cow/calf industry.
• 57% agreed (9% disagreed) that replacing the voluntary system with the mandatory system has been beneficial to the beef industry.
• 52% agreed (11% disagreed) that replacing the voluntary system with the mandatory system has been beneficial to the cow/calf industry.
On the issue of price transparency, “a majority of respondents do not believe that regime change in the public price reporting system has improved market transparency or increased market efficiency.” When asked if the mandatory reporting system improved the price discovery process in their region, a majority of producers were unsure (57% on slaughter cattle, 53% on stocker cattle, and 49% on feeder calves.) About a third of the respondents agreed that, with the implementation of MPR, the price discovery process improved in their region. “Given that Dakota cow/calf producers expressed a preference for local market information during the price discovery process, it appears that producers would also prefer greater coverage of local markets in public price reports.”
The Dakota researchers say their findings on when producers make marketing decisions point to several facts:
• Cow/calf operators tend to make decisions regarding herd size, retaining feeder cattle, and retaining stocker cattle primarily on the availability of pasture.
• Producer preference for local information sources is also a plausible explanation for why a strong majority of respondents do not believe that the value of public price reports as an input into their marketing decisions has increased as a result of regime change in public price reporting for fed cattle.
• A majority of producers in both the feedlot and cow/calf industries do not believe the public price reporting has improved their negotiating position under the mandatory price reporting system.
Summary:
Feeder calf and stocker producers would prefer to sell to other backgrounders or feedlots based on information gathered from local auctions to help them determine the value of their livestock. The further away from the home pasture the information originates, the less trusted it is, even with the USDA’s Mandatory Price Reporting System. Although that system is not distrusted, a majority of producers are uncertain of its reliability.
Posted by Stu Ellis on November 21, 2006 12:59 AM to farmgate