USDAâ€™s Economic Research Service studied fed cattle markets to compare the mandatory price reporting system developed by USDAâ€™s Agricultural Marketing Service in 2001 with the previous voluntary reporting system. The study evaluates whether the mandatory system has improved the amount and quality of information available to the market.
ERS found that prices received with formula purchasing arrangements, which were not comprehensively reported under the voluntary system, appear to closely match prices received with negotiated purchases. The trend toward formula purchases has slowed since mandatory price reporting was implemented. Plus the volume of cattle moving under negotiated purchases has climbed.
Futures prices did not seem to respond to prices under mandatory reporting. However, the mandatory data seem to better represent market conditions. Other market factors such as cyclically low cattle inventories and the discovery of BSE in North America may have influenced the shift back to negotiated cash transactions.
Impact of formula cattle
On average, formula prices slightly exceeded negotiated prices for cattle in common quality categories and priced on the same basis. However, the difference was small and inconsistent. Negotiated prices actually exceeded formula prices in nearly 40% of the weeks observed.
Moreover, in regression analyses of the spread between cattle prices and boxed beef wholesale prices, with controls for time period, pricing basis, quality grade category, and cattle class, the spread was not significantly different for cattle sold under formula than for cattle sold under a negotiated cash transaction.
Livestock Mandatory Reporting did not simply expand existing reporting procedures to more transactions. Rather, it introduced major changes in the ways that data from all covered livestock transactions are collected, organized and disseminated through reports.
Implementing LMR, thereby, created important challenges for USDA in system design and for industry participants in system use and application. The challenges in system design led to an important lag between initial implementation of LMR and delivery of Market News reports that made full use of accurate LMR information.
After implementation of LMR, several regional and local reports under the voluntary system were no longer provided. However, the mandatory system provided far more information on prices and volumes in formula sales of cattle in national and major regional reports and for different pricing basis and quality categories. This information on formula transactions allowed for rapid, accurate comparisons to similar information for negotiated transactions, comparisons that previously had not been possible.
Expectations for higher prices may have been too high
A few months after LMR implementation, cattle feeders expressed disappointment with the Act via survey responses. Their expectations for LMR may have been too high, thus leading to disappointment fueled by problems encountered in implementation.
Disappointment also may have reflected expectations that LMR would show a gap between formula and negotiated prices, a gap that would then be closed through rising formula prices. Shortly after LMR was implemented, however, the strong shift in cattle sales toward formula transactions abated, and sales distinctly shifted back to negotiated cash transactions.
The timing suggests that LMR may have been a factor in the shift, although other market drivers during the period also may have influenced the choice. In particular, the sharp rise in cattle prices and increased uncertainty due to BSE scares may have played important roles in the shift in purchase types and certainly complicate any evaluation of LMR.
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