Seasonality in Fed Cattle Transactions and the Role of Negotiated Cash

First paragraph: Alternative Marketing Arrangements (AMA) have once again taken center stage in the cattle market over the last several weeks. It is common knowledge that the use of AMAs varies by geographical region with Southern Plains feedlots using a larger share relative to Northern Plains feedlots. A long-standing issue is whether each geographical region is contributing a perceived appropriate amount of negotiated cash trade to aid in price discovery. This issue has intensified as the national level of negotiated cattle continues to decline. Lower cash prices and increased volatility due to COVID-19 government quarantine measures and the Holcomb Fire have appeared to intensify this issue among market participants. Last paragraph: Both proposed bills put forth by the U.S. Senate have stated that need for more price discovery due to the Holcomb Fire and COVID-19 market disruptions. Figures 1-5 graphically show that the national level of negotiated cash was likely not significantly impacted by either market disruptions. The current concern surrounding AMA’s (i.e. formula/grid pricing) has more to do with lower cash prices received by producers due to market reactions to major market disruptions than the role of AMA’s role in thinly traded markets. While both bills would bring increased negotiated cash price discovery and transparency in the feedlot-packer market interface, neither are likely to increase the cash price received by producers since they do not fundamentally change the supply of fed cattle nor the demand for wholesale beef. Further, it is unlikely that if these bills were implemented prior to either the Holcomb Fire or COVID-19 it would have prevented the backlog in cattle nor affected the demand for wholesale beef. If implemented, these policies would create additional transparency but potentially creating increased costs and reducing profitability for the entire beef complex. Consistent with the economic theory of derived demand, the additional costs of these policies are likely to predominately carried by the cow-calf industry

Pre COVID-19 Market Conditions Persist & the Stocker Industry Can Dampen the Damage

First paragraph: The effects of COVID-19 on the livestock market are well known and felt. Some effects include depressed futures and cash prices, unusual basis patterns, decreased packer bids and sale barn volume, packing plant closures, consumer hording of meat products, and shifting food service products for retail consumption. All these effects occurred as market participants grappled with everchanging government and industry policy which reduced consumer demand and resulted in bottlenecks and increasing supply gluts upstream. Simultaneously reducing demand and increasing supply always cause prices to plummet, and in the case of COVID-19 very rapidly. Some segments of the market are likely to begun to stabilize as government lockdown restrictions are lifted. However, the beef complex still has significant supply and demand issues to sort through in the coming months

Live Cattle Basis Due to Covid-19: Deviations and Convergence

A Fundamental Review on Basis Basis is defined as the cash minus futures. Cash market reflects today\u27s supply conditions and price. Futures market reflects upcoming supply and demand conditions. If it is anticipated that there will be a period of increasing supplies, futures prices will decline to reflect that information. Likewise, periods of time with expected decreasing supplies, future prices are expected to increase. Since cash and futures prices can move simultaneously, basis will fluctuate through time. In periods where basis becomes more positive (i.e. basis is said to be strengthening/narrowing) it implies that cash prices are increasing more relative to futures. As basis becomes more negative (i.e. basis is said to be weakening/widening) it implies that cash prices are decreasing relative to futures. Basis can weaken or strengthen in periods of declining or rising futures and cash prices. Declining cash prices does not necessarily imply weakening basis. It is the relative relationship between cash and futures that determine basis. Futures markets exist as an exchange or risk transfer between market participants. Cattle producers agree to deliver cattle to a given location, date, and specified price. Packers or meat wholesalers agree to purchase cattle under contract specifications. This contract for future delivery allows both parties to better predict output/input prices and thus profitability. The contract does not eliminate risk but rather allows the exchange of price risk for basis risk. Since basis is specific to a time a place, it must be predictable and reliable to allow the futures markets to be used as an effective risk management strategy. The basis position provides some signal of the near future supply and demand conditions. If basis is negative the market is said to be a “normal market” implying no supply shortage. In order for producers to bring cattle to market, basis would need to increase. When basis is over, the market is said to be a “premium market” implying a supply shortage. Producers see the basis and have an incentive to deliver to the market thus decreasing basis

Hog Barn Density and Location in U.S. and Nebraska

There is strong local and national interest in adding hog barns to existing row crop operations. Declining on farm income over the past several years has accelerated this interest. Grain operations cite diversifying farm income, adding another family to the farm operation, and/or replace commercial fertilizer expense as the primary reasons for adding a hog barn. While there is industry demand to increase hog contract growing, these agreements can possess significant benefits and risks to producers. This is the first of a four part series which will discuss some financial and legal implications of adding a hog barn to an existing grain operation. In this first part, I discuss how the type of hog operations in the US have changed over time, where hogs are raised in Nebraska, and how Nebraska compares to other states

Has COVID-19 Impacted Price-Weight Relationships and Value of Gain?

First paragraph: In the beginning of COVID-19, much of the attention was focused on managing the redirection of meat product from food service to retail stores. This past month has keenly focused on packing plant closures due to COVID-19 cases among workers and how to manage the supply of fat cattle already ready for slaughter. Fat cattle available for slaughter either cannot get bids or bids are significantly below breakeven prices leaving feedlots with decisions to be made about marketing and placements. The April 2020 Cattle on Feed report (https://usda.library.cornell.edu/concern/publications/m326m174z) revealed March placement decisions. Placements were down about 10% from February 2020 and 25% from March 2019. This was partially due to depressed nearby and deferred future bids, although the nearby bids appear to be discounted greater, suggesting that the market — at least right now — believes demand for product will recover in the second half of the year. Marketings as a response to plant closures will come in the June 2020 Cattle on Feed report

The Impact of Low Stocks-to-use Ratio and the Ukraine-Russia Conflict on the Distillers-to-Corn Price Ratio

Distillers’ grains play an important role in both maintaining ethanol plant profit margins and providing affordable, nutritious feed to livestock feeding operations. Distillers’ grains are produced as necessary by-products of the fuel ethanol production process and therefore rely on an input grain – most commonly corn in the United States – and fuel ethanol in their production (USDA ERS 2021). As a result, the primary tenets of the supply structure in the distillers’ grains market In the United States are fuel ethanol and corn, while livestock operations in need of feed products comprise the majority of distillers’ grain demand structure

Stochastic Tests on Live Cattle Steer Basis Composite Forecasts

Since the seminal papers of Bates and Granger in 1969, a superfluous amount of information has been published on combining singular forecasts. Materialized evidence has habitually demonstrated that combining the forecasts will produce the best model. Moreover, while it is possible that a best singular model could outperform a composite model, using multiple models provides the advantage of risk diversification. It has also been shown to produce a lower forecasting error. The question to whether to combine has been replaced with what amount of emphasis should be placed on each forecast. Researchers are aspired to derive optimal weights that would produce the lowest forecasting errors. An equal composite of the mean square error, by the covariance, and the best previous model, among others, have been suggested. Other academicians have suggested the use of mechanical derived weights through the use of computer programs. These weights have shown robust results. Once the composite and singular forecasts have been estimated, a systematic approach to evaluate the singular forecasts is needed. Forecasting errors, such as the root mean square error and mean absolute percentage error, are the most common criteria for elimination in both agriculture and other sectors. Although a valid mean of selection, different forecasting errors can produce a different ordinal ranking of the forecasts; thus, producing inconclusive results. These findings have promoted the inspection for other suitable candidates for forecast evaluation. At the forefront of this pursuit is stochastic dominance and stochastic efficiency. Stochastic dominance and stochastic efficiency have traditionally been used as a way to rank wealth or returns from a group of alternatives. They have been principally used in the finance and money sector as a way to evaluate investment strategies. Holt and Brandt in 1985 proposed using stochastic dominance to select between different hedging strategies. Their results suggest that stochastic dominance has the opportunity to feasibly be used in selecting the most accurate forecast. This thesis had three objectives: 1) To determine whether live cattle basis forecasting error could be reduced in comparison to singular models when using composite forecasts 2) To determine whether stochastic dominance and stochastic efficiency could be used to systematically select the most accurate forecasts 3) To determine whether currently reported forecasting error measures might lead to inaccurate conclusions in which forecast was correct. The objectives were evaluated using two primary markets, Utah and Western Kansas, and two secondary markets, Texas and Nebraska. The data for live cattle slaughter steer basis was taken and subsequently computed from the Livestock Marketing Information Center, Chicago Mercantile Exchange, and United States Department of Agriculture from 2004 to 2012. Seven singular were initially used and adapted from the current academic literature. After the models were evaluated using forecasting error, stochastic dominance and stochastic efficiency, seven composite models were created. For each separate composite model, a different weighting scheme was applied. The “optimal” composite weight, in particular, was estimated using GAMS whose objective function was to select the forecast combination that would reduce the variance-covariance between the singular forecasting models. The composite models were likewise systematically evaluated using forecasting error, stochastic dominance and stochastic efficiency. The results indicate that forecasting error can be reduced in all four markets, on the average by using an optimal weighting scheme. Optimal weighting schemes can also outperform the benchmark equal weights. Moreover, a combination of fast reaction time series and market condition, supply and demand, forecasts provide the better model. Stochastic dominance and stochastic efficiency provided confirmatory results and selected the efficient set of the forecasts over a range of risk. It likewise indicated that forecasting error may provide a point estimate rather than a range of error. Suggestions for their application and implementation into extension outlook forecasts and industry application are suggested

Heifers on Feed Indicate Long-Term Liquidation Still Occurring

Beef cow herd liquidation occurred in a significant way in 2022 due to a combination of strong lean beef demand, higher cull cow prices, and forage issues due to drought. Fewer cows results in fewer feeder cattle, tightening supplies for fed cattle, and ultimately lower beef production in 2023. The USDA-NASS Cattle Inventory report is released at the end of this January and analysts\u27 estimates for beef cow reduction are in the 3-4% range. This will directly affect feeder cattle numbers in 2023

Comparing Profitability and Management Factors Across Operation Type: Independent vs. Contract Growing

First paragraph: There is strong local and national interest in adding hog barns to existing row crop operations. Declining on farm income over the past several years has accelerated this interest. Grain operations cite diversifying farm income, adding another family to the farm operation, and/or replacing commercial fertilizer expense as the primary reasons for adding a hog barn