Putting Competition Back In the Cattle Market

What is the going rate for one head of cattle? How are those prices determined? It would make sense that the price is set by the amount the producer is willing to accept, however, some ranchers have brought attention to the fact that the practice of raising and selling cattle has become much more complex than necessary. In theory, a competitive cattle market depends on buyers competing for cattle and producers having a role in determining their worth. However, over time, increasing numbers of cattle have been committed to buyers long before slaughter through unpriced contracts. Ranchers today are questioning if today’s cattle market still provides enough competition to discover a fair price. 

There are two common types of cattle sales: a traditional cash sale or an unpriced contract. Through a traditional cash sale, the price is negotiated by the producer and the packer while the cattle are still in the producer's possession. An unpriced contract is different. The cattle are committed to the packer long before slaughter, and then the price is determined through a formula tied to the market. This type of contract is tricky because the producer does not have a direct say in what his cattle are valued for, instead, he must accept the price given by the packer. Ranchers have raised concerns because of the alarming amount of cattle that are committed outside of direct negotiations and because they want to ban unpriced contracts. The issue is that if the mega-cattle operations are committed based on the packer’s formula, there are not enough cattle available for buyers to actively bid on. If the remaining cattle that are typically used to set price benchmarks are committed to packers, how are ranchers supposed to know if the prices they’re offered are competitive?

Ranchers have affirmed that their argument is not necessarily big operations versus small. Instead, they question whether all operations are following the same rules. If larger cattle operations do not need to compete for their cattle, smaller operations cannot keep up. Smaller independent operations cannot simply become mega-feedlots, but if all operations were to compete under fair rules with meaningful price discovery, this would prevent any participant from gaining an unfair price advantage. 

The purpose of a competitive market goes beyond the revenue ranchers make from a sale. When prices are discovered through a legitimate method, they signal what the supply and demand are for the industry. Higher prices signal that the supply is low and ranchers should invest in rebuilding their herds. However, if producers believe the prices they are given do not accurately reflect the market, they will not be inclined to invest in herd expansion. This situation threatens multigenerational and independent operations as weakened signals prevent them from adjusting their businesses to fairly compete within the market.

If smaller operations are not given the opportunity to compete fairly, this will result in the closure of their businesses. This poses a direct threat to the domestic food supply. A shrinking domestic supply will increase the U.S.’s reliance on imported cattle and beef. If policymakers want a resilient American beef supply, it is pertinent that they preserve and ensure that independent producers can participate fairly and competitively within the marketplace.

American agriculture should work from the bottom up. A competitive market should clearly signal the current marketplace themes to its producers, ensure that they are rewarded for raising valuable product, and reap more of the economic benefits of their labor to support their businesses and rural communities. To create fair competition, larger operations do not need to be punished to protect the smaller ones, but instead should require clear, measurable rules to find accurate prices within the marketplace where everyone has to play by the same rules.