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Formula sellers - friend or foe?

Texan

Well-known member
Here's a thought-provoking commentary that's up at The Cattle Report this week. Of course, I know some of us don't like to have our thinking provoked. :lol:

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CASHING IN

No one ever said selling cattle was an easy job. Emotionally, at times, it can be exhilarating like when you sell the pen you started the week pricing at $98 for $100 at the end of the week. But there are always the cattle you passed a $98 bid, only to end up selling at $96. Or the pen you end up not selling at all and the market is in a freefall. The impact can be devastating.

Selling any moving commodity will always be stressful. It is especially stressful for those who are charged with the responsibility of selling someone else's cattle. The manager of the feedyard or the specialist hired to sell, will always be second guessed on every turn. It is easy in hindsight to know what you should have done and many cattle owners are ready to remind you. The reality of full accountability is a large burden and it weighs on the soul.

It is not surprising for those selling in the cash market every week to develop natural resentments to the formula sellers sitting on the sidelines, pricing their cattle off the sweat and toil of those fighting in the cash arena every day. Some sellers are trying to do something about it. In the past several weeks, some sellers have tried to undermine the mandatory reporting of cash cattle by selling in such a way that their cash sales are not reported. The methodology is selling cattle at 50 cents over a cash floor. This past week the first sale in Texas was 10,000 cattle sold at 50 over $97.50 floor. In other words the cattle sold at $98 but because of the 50 cents over feature, they are thrown into the formula sales for mandatory reporting purposes.

This particular week, the ploy may have backfired because if Texas held the recent $1 premium to other regions, Texas cattle should have sold for $99 -- one dollar higher than the other areas of the country. This fact is really beside the point. The more important issue is questioning the need to reform the selling practices for fed cattle and a broader discussion about alternatives for price discovery. Both buyers and sellers would agree that trading cattle for one brief period each week is not good business.

What is a cash sale and how should cash sales fit into mandatory price reporting? A common sense definition of a cash sale is an agreed price reached during the course of a week for cattle placed on the showlist during the week. This, of course, would broaden the current reporting to include grid sales, in the beef sales and contingent live sales with a base off this week's cash. This view would more properly reflect the state of current trading and would broaden the reporting base.

The proposition to be tested is: "Would the cash market be stronger if the formula trades are busted?" This would create more cash transactions each week but would not change the supply of cattle or the demand for beef. Some might argue, with sound logical support, that formula cattle set up beef channels allowing processors to match specific beef production with more consistent characteristics to retail programs highlighting those characteristics. Those programs would be lost if the formula cattle were discontinued. This argument would assert that formula cattle benefit cash sellers, by creating more demand for beef. Consumers eat more beef because of a "natural" product or "guaranteed tender" or "source verified" product. This benefits all beef producers and would be impossible without formulas.

Grain is traded every day of the week and prices are negotiated basis the futures. It would not be a bad idea for cattle to trade basis the live cattle futures. It also would be easy and inexpensive for live daily auctions on the internet to establish daily prices for fed cattle. Packers could compete for pens of differing quality and each pen would bring a different price depending on the pen specifications. This would more effectively reflect the true value of each pen rather than working off averages for all pens in a yard.

Formula sellers and grid sellers are seeking a base price from which to start before adjustments for premiums and discounts. Formula sellers want a indexed price while grid sellers want to negotiate the base beef price. This base price does not necessarily require the use of cash sales. It could be based on futures or even the box cutout.

In the end, cattle owners have a lot of options for methods of selling cattle and price discovery is accomplished in many diverse ways. The markets are best served when each seller is primarily occupied with selecting and effecting the best price available to them rather than worrying about how others sell cattle. The formula seller might be the friend of the cash seller instead of the enemy.



http://www.agcenter.com/newcattlereport.aspx
 

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