To bolster price discovery, USDA said it will require meat packers to report cattle purchases made via online auctions to the department starting Oct. 5, a move that traders hope will bring more transparent markets. USDA’s Agricultural Marketing Service (AMS) will begin including transactions from auctions on the Fed Cattle Exchange in pricing reports that top packers use to determine how much they should pay farmers for an increasing percentage of animals sold. That means the exchange, which has held eight auctions since launching in May, will begin impacting prices that packers pay in the broader market.
USDA said cattle sold weekly on an exchange owned by Superior Livestock Auction LLC, which says it is the largest U.S. marketer of cattle using televised and internet auctions, will be added to the mandatory reports on negotiated purchases. The livestock industry requested the data inclusion, the government said in a statement.
“In recent years, participation in the cash slaughter cattle market has declined significantly from 37% nationally in 2010 to 25% today,” USDA said. “This occurred as the supply chain moved to using more formulas and forward contracts to market cattle more efficiently,” and that “reduced opportunities for price discovery in the negotiated market,” USDA added.
“After review, it has been determined that livestock traded in this manner would meet the definition of a ‘negotiated purchase’ as the Fed Cattle Exchange is merely a trading platform,” USDA said. “Negotiation does occur as buyers can bid on the livestock offered and sellers can accept or refuse the final bid. In addition, delivery must be scheduled within 14 days of the sale.”
Industry groups have blamed high-frequency traders and a lack of cash transactions for increasing futures volatility, which deterred animal owners and meatpackers from using the contracts for hedging.
Adding transactions from Superior’s Fed Cattle Exchange will increase the volume of negotiated purchases from 1.5% to 2%, USDA said. Cattle futures on the Chicago Mercantile Exchange have slumped 25% this year. Cash steer prices reported by USDA have dropped 23% in 2016.
Starting Oct. 5, the AMS Livestock, Poultry and Grain Market News (LPGMN) will begin including in the National and Regional direct negotiated slaughter cattle reports, cattle purchased through the Fed Cattle Exchange by packers required to report according to the LMR (Livestock Market Reporting) Act and regulation. “Based on the weekly sales activity since launching in May of this year, approximately 1,800 head of cattle per week have been offered through the Exchange at price levels in line with the current weekly reported markets,” USDA said.