Livestock Pricing

    To fully understand how livestock prices, and eventually the meat prices we pay, are set you would need a PhD in Agricultural Economics.  The goal of this article is to provide a brief and simple overview of how information is collected and how prices are determined for livestock sold by producers to packers.  In future articles, we will take a look at how the prices we pay for meat for our restaurants come about.

    Most cattle is bred and raised by ranchers, usually shipped to feed lots for “fattening”, and then sold to slaughter houses and packers to be fabricated into useable products, such as ribs, strips and ground meat.  Lamb and pork are similarly handled but usually go directly from producer to packer.

    Livestock prices are determined by supply and demand.  The key to establishing the price for each transaction is accurate information; how much product is being offered for sale by producers at a given time and how much product buyers are offering to purchase at that time and how much they are willing to pay.  To fairly determine the "market" price, both sides need accurate and time information, similar to stock traders on Wall Street.

    Dating back to the Packers and Stockyards Act of 1921, the USDA's Grain Inspection, Packers, and Stockyards Administration (GIPSA) was given a mandated to collect price and quantity information to ensure fair competition and fair trade practices in the meat industry.  Although packers and others were required to provide this information when GIPSA requested it, the data almost always came from past dealings rather than current transactions. Consequently, it was often of little use to buyers or sellers looking for current price information.

    Under the broad authority of the Agricultural Marketing Act of 1946, the USDA’s Agricultural Marketing Service’s (AMS) Livestock and Grain Market News Branch collected and reported livestock and meat prices along with related market information.  Most transactions took place on the open or spot market. The agency's trained market reporters attended public livestock auctions, visited feed lots and packing plants, personally contacted many individual buyers and sellers, and consulted with trade associations to develop their data so that buyers and sellers all had access to accurate and objective information from major markets throughout the country.  The information was disseminated through daily, weekly, monthly, and annual reports covering sales of live cattle, hogs, and sheep, and of the wholesale meat products from these animals.

    During the 1980’s and 90’s, the livestock industry, particularly the meat packing segment, underwent fundamental changes, both structurally and in its marketing practices.  By the late 1990’s just four firms slaughtered about 80% of all fed cattle, and four firms slaughtered about 55% of all hogs, for example.

    Rather than buying livestock in open cash markets, these large packers increasingly fed their own animals or used private marketing arrangements, such as forward contracts, formula pricing, and exclusive purchase agreements to purchase the majority of their livestock.  Prices and terms of sale were seldom publicly disclosed for these transactions. 

    As the number of spot cash market transactions diminished, the reported prices from these transactions, which tended to be lower than privately negotiated sales, became questionable as indicators of true market conditions.  Producers claimed that packers were selectively providing information from only the lowest priced transactions to the USDA in order to drive prices down.

    Government and producer efforts to coax more information from firms on a voluntary basis largely failed.  Livestock producers, particularly the small ones, contended that they were at a competitive disadvantage when negotiating with large meatpackers because they lacked the data necessary to quickly and easily compare bids from different packers and to negotiate the best possible price for their livestock.

    In 1998-99, many states took matters into their own hands and passed legislation that required packers to reveal the price they paid whenever they purchased livestock. The laws gave ranchers and farmers more information on the market price for animals, preventing packers from driving livestock prices to record lows. As South Dakota, Iowa, Missouri, Minnesota and Nebraska passed such legislation, pressure for a national law built. In October 1999, Congress followed the states' lead and passed mandatory price reporting as part of its 1999 Agricultural Appropriations Bill.

    To help restore competition to the livestock market, on April 2, 2001, the USDA's Agricultural Marketing Service (AMS) began collecting and disseminating livestock market information under the Livestock Mandatory Reporting Act of 1999.  The law required meat packers to make daily reports of the prices paid for cattle, hogs and lamb. Reporting is required twice daily for all packers processing 125,000 head of cattle annually on price, volume, and the terms of transaction. All types of transactions must be recorded, whether the livestock are acquired from the open market or forward contracts to the packers themselves. Both imports and exports are also recorded. Similar requirements apply to hog processors packing 100,000 or more hogs a year. All information must be reported to the Secretary of Agriculture, who must then make the data public immediately.

    Buyers and sellers alike, now have access to all of the pertinent information necessary to negotiate prices.  With all this data, prices themselves are still determined by supply and demand.

http://www.ams.usda.gov/lsmnpubs/

http://www.ams.usda.gov/poultry/mncs/index.htm

http://www.ams.usda.gov/lsg/mpr/mprbackground.htm

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