Volatile cattle markets have affected every segment of the cattle industry over the past year. Producers, industry groups and commodity traders have attempted to solve the problem through various measures, including: shortening trade hours, placing seasonal discounts for futures at a single delivery location and addressing high frequency trading.
Still, those measures couldn’t solve the issue of price discovery. Fewer fed cattle are being sold through cash markets, while an increasing percentage are marketed through formula pricing.
At a Texas Cattle Feeders Association marketing committee meeting in the fall of 2015, Jordan Levi, managing member at Arcadia Asset Management in Oklahoma, proposed the idea of an online auction for fed cattle.
“We wanted to provide a more transparent means for marketing live cattle,” says Levi, who also feeds cattle. He also hoped that such an initiative would aid in creating a starting price for cattle trade and show regionalized markets.
Mike Thoren, president and CEO of JBS Five Rivers, and Levi conducted an initial trial run on Jan. 18, 2016, with representatives from the four major packers – National Beef, Tyson Foods, Cargill and JBS – all participating.
“Our industry can get complacent at times,” Thoren says. “I think when you have good ideas that make sense you need to try and get them going.”
These concepts were shared and built upon at the National Cattlemen’s Beef Association annual meeting in San Diego. It ultimately led to the creation of the Fed Cattle Exchange, hosted and owned by Superior Livestock.
Moving Cattle Online
The online format was further developed with the aid of producers, packers and industry personnel during the spring of 2016, says Sam Hughes, manager of the Fed Cattle Exchange.
Initial sale offerings were light in volume with only 7,246 cattle offered in the first four auctions combined from May 25 to June 22. However, head totals increased each week as more feedlots became involved. The June 22 sale had nearly 40% of the offerings for the first auctions. The Exchange temporarily went on hiatus during the summer to help fix some technical issues and improve user experience.
The online auction made its return on Sept. 14, with sale offerings below 2,000 head at the restart.
However, the Exchange received a major boost in credibility when the U.S. Department of Agriculture included sale results in the Livestock Mandatory Reporting program starting October 5.
The involvement of the USDA and a rallying fall cattle market helped to increase the volume. From Oct. 19 to Nov. 16, more than 12,000 cattle were offered at each auction. Hughes says this was also the same time several Nebraska cattle feeders got involved with the Exchange.
How it Works
Auctions occur every Wednesday at 10 am CST. Showlists for upcoming sales are built on the preceding Thursday, Friday and Monday. Cattle feeders share various information in the lists such as expected outweights, cattle type and estimates on yield and quality grade. There is the option to share photos of the load lots being sold.
“It is up to the packer to go see the cattle and make the best assumption,” Hughes says. “Then they can bid on them accordingly on the Exchange.”
Feedlots participating in the Exchange are charged $1 per head. Cattle feeders have the option to set a price floor on cattle and are not forced to sell if their price is not met. Bids are made by packers in $0.25 increments.
The most actively involved state at offering cattle has been Nebraska. Other states to participate include: Colorado, Illinois, Iowa, Kansas, North Dakota, Oklahoma, South Dakota and Texas.
All four of the major players in the packing industry have been involved thus far participating on a weekly basis. A few regional packers have also actively participated.
With more packers participating, the Fed Cattle Exchange has brought additional competition to feedlots that might have only one or two options to sell with, Hughes says.
Since the inception of the Exchange, both Levi and Thoren have marketed cattle through the online sale.
Levi still has varying percentages of cattle sold through formulas, basis or live channels. He manages to direct at least one group per week through the Exchange.
“I’ve always looked at the Fed Cattle Exchange as a place to send a small, representative sample of your underlying showlist so that base price for business-to-business relationships is more representative of the region and cattle quality,” Levi says.
JBS Five Rivers traditionally sends all its cattle through the JBS packing plant system. Now, almost every week, some of their cattle have been offered in the online auction.
“We put them out there for the open market. We’ve had our competitor packing companies buy our cattle,” Thoren says. “Price discovery is not a free good, and I very much believe in the value-based system. You’ve got to have that base price.”
Having the exchange has allowed a vertically integrated company like JBS to participate with the entire industry in setting a weekly base price.
Levi has been happy with the results he has seen selling cattle on the Exchange and believes it will support all cattle producers.
“I think it has helped dampen volatility in the futures market, which allows producers to have a more effective risk management tool,” he says.
Agriculture economists such as the University of Tennessee’s Andrew Griffith have been keeping watch of the Exchange as another data point for fed cattle trade.
“The benefit is that it gives us a glimpse of the market a little bit earlier in the week. On these finished cattle, many feeders want to wait until Thursday or late-Friday because they are watching the futures market,” Griffith says.
While observing the Exchange in its brief history, Griffith has noticed trends of feeders willing to sell during futures’ market upswings and lots going unsold during softer futures’ weeks.
Having price discovery at the fed cattle level should have trickledown effects to stocker and cow-calf producers.
As feedlots sell cattle, more replacements must be purchased to fill pens, Griffith says.
“When they see a little positive price movement that helps us out here in the country who are trying to move 800 lb. steers,” Griffith says. “For me in the Southeast that is important because it is another data point.”
The Future for Helping Futures
Going forward both Hughes and Griffith would like to see the volume of cattle sold continue to increase and come from more areas of the country.
“We’d especially like to see more cattle from feedlots that typically only market on a formula or grid basis,” Hughes says.
Griffith adds the number of cattle being sold is still small and the Exchange has not brought in enough cattle to establish cash prices nationally.
“When you get down to it, most of the cattle are coming out of Nebraska, which very much regionalizes it. What we’re feeding in Nebraska isn’t going to help price discovery in Texas,” Griffith says.
Having additional cattle sold live should help benefit the entire industry by having increased price discovery thanks to extra data points.
Note: This story appears in the January 2017 issue of Drovers.