Long-term cattle selling agreements come with good and bad: US expert

This message was delivered by leading US agricultural economist Professor Ted Schroeder at the Australian Meat Processor Corporation’s conference in Sydney late last month.

The advent of what is known as formula arrangements had delivered substantial change to the US beef supply chain over the past decade, both positive and negative.

With beef processors and producers in Australia pushing hard for increased value chain integration to reduce costs and facilitate more information sharing, Prof Schroeder’s account of the changes in his country’s supply chain coordination proved very enlightening.

Ten years ago, 30 per cent of US cattle transactions between feedlotters and packers happened under a formula system and today that figure is 60pc.

“What got displaced was the negotiated scheme, where a feedlot says ‘here’s what is available’ and eventually accepts a packer’s bid and then delivers the cattle,” Prof Schroeder said.

“What was good was that it engaged both buyer and seller in price discovery on a day-to-day basis.

“As much information as you can envisage is flowing into that process. It has to as no player can afford not be informed because his livelihood is at stake.”

Over time, many feedlot owners became frustrated with the costs and cumbersome nature of the process.

They had to dedicate a full time guy to negotiate with packers and some weeks did not even sell their cattle, Prof Schroeder said.

“The next week those cattle were 25 pounds heavier and then they had swung the leverage over to the buyer who would take them to the cleaners,” he explained.

It’s a similar story told by producers using saleyards in Australia.

The move to agreements based on a long-term price negotiation involving up to a year’s worth of transactions meant feedlots could factor in all discounts thanks to having the certainty of knowing where cattle were going each week.

It was seen as a win:win, certainly it was a far more collaborative environment,  but time has shown there are trade offs and one of those has become very acute right now, according to Prof Schroeder.

The formula approach has dominated to the point where the cash negotiated price is now so thinly traded in many of the big cattle regions like Texas and Kansas that it is no longer trusted as a true representation of market fundamentals.

Producers also realised they could go downstream and create relationships with distribution companies or even retailers, Prof Schroeder said.

“Packers start to become a cost centre, rather than the driver of the supply chain,” he said.

Prof Schroeder said the formulae relationship  was now under regulatory stress, with the US Department of Agriculture currently having policy in development that could put it at risk.

“What it will look like two years from now, I don’t know,” he said.