Proposed Rule2024-23528
Price Discovery and Competition in Markets for Fed Cattle
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Published
October 11, 2024
Issuing agencies
Agriculture DepartmentAgricultural Marketing Service
Abstract
The United States Department of Agriculture's (USDA or Department) Agricultural Marketing Service (AMS or Agency) is seeking advance comment on a proposal to amend the regulations under the Packers and Stockyards Act (P&S Act or Act). The purpose of this advance notice of proposed rulemaking (ANPR) is to solicit feedback on an identified set of regulatory options that AMS could employ to address concerns regarding price discovery and fairness in fed cattle markets. Information from public comments would inform AMS's approach to this topic, including any future regulatory changes.
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[Federal Register Volume 89, Number 198 (Friday, October 11, 2024)]
[Proposed Rules]
[Pages 82519-82537]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-23528]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 89, No. 198 / Friday, October 11, 2024 /
Proposed Rules
[[Page 82519]]
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
9 CFR Part 201
[Doc. No. AMS-FTPP-24-0013]
RIN 0581-AE30
Price Discovery and Competition in Markets for Fed Cattle
AGENCY: Agricultural Marketing Service, Department of Agriculture.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The United States Department of Agriculture's (USDA or
Department) Agricultural Marketing Service (AMS or Agency) is seeking
advance comment on a proposal to amend the regulations under the
Packers and Stockyards Act (P&S Act or Act). The purpose of this
advance notice of proposed rulemaking (ANPR) is to solicit feedback on
an identified set of regulatory options that AMS could employ to
address concerns regarding price discovery and fairness in fed cattle
markets. Information from public comments would inform AMS's approach
to this topic, including any future regulatory changes.
DATES: Electronic or written comments must be submitted by December 10,
2024.
ADDRESSES: Comments can be submitted through the Federal e-rulemaking
portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> and should reference the document
number and the date and page number of this issue of the Federal
Register. AMS strongly prefers comments be submitted electronically.
However, written comments may be submitted (i.e., postmarked) via mail
to Docket No. AMS-FTPP-24-0013, S. Brett Offutt, Chief Legal Officer,
Packers and Stockyards Division, USDA, AMS, FTPP; Room 2097-S, Mail
Stop 3601, 1400 Independence Ave. SW, Washington, DC 20250-3601. All
comments submitted in response to this advance notice of proposed rule
will be included in the record and will be made available to the
public. Please be advised that the identity of individuals or entities
submitting comments will be made public on the internet at the address
provided above. Parties who wish to comment anonymously may do so by
entering ``N/A'' in the fields that would identify the commenter. A
plain-language summary of this advance notice of proposed rule is
available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> in the docket for this
rulemaking.
FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Chief Legal Officer/
Policy Advisor, Packers and Stockyards Division, USDA AMS Fair Trade
Practices Program, 1400 Independence Ave. SW, Washington, DC 20250;
phone: (202) 690-4355; or email: <a href="/cdn-cgi/l/email-protection#7c0f521e0e19080852131a1a0908083c090f181d521b130a"><span class="__cf_email__" data-cfemail="cdbee3afbfa8b9b9e3a2ababb8b9b98db8bea9ace3aaa2bb">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
AMS seeks input from stakeholders about ways to improve price
discovery and fair and competitive trading environments in fed cattle
markets, many of which are concentrated markets. Those concentrated
markets may have played a role in packers imposing fed cattle
purchasing agreements on producers, commonly known as alternative
marketing arrangements (AMAs), that use some method of calculating
prices other than cash negotiated or ``spot'' pricing. Fed cattle AMAs
have achieved a well-established position in the cattle industry,
accounting for the majority of cattle traded. The vast majority of AMAs
are formula pricing agreements that use an external benchmark price to
establish a base price in the contract when determining the price a
seller will receive. In formula contracts, which this ANPR focuses on,
the base price is not known when the contract is signed, and it
fluctuates in accordance with the benchmark. Aspects of the design of
formula contracts have some adverse consequences--directly or in
conjunction with certain trading practices--for producers and the
markets in which they operate, and potentially for other packers
seeking to compete for fed cattle in the market. It is possible that
some of these adverse consequences could give rise to a violation of
the Act or other antitrust laws.
This ANPR seeks comment on a range of options designed to ensure
that base prices in formula pricing agreements are broadly
representative of fair market conditions and are not vulnerable to
unfair, deceptive, manipulative, unduly preferential, or
anticompetitive practices that could cause prices to shift. The
targeted options also seek to address obstacles that market
participants face when engaging in price discovery and contributing to
transparent markets. These options are further intended to mitigate the
market design, trading practices, or preferences that underlie the
complaints AMS has received over the years relating to aspects of
formula pricing agreements and their impact on producers and the cattle
markets.
AMS seeks comment on the experience of producers, packers, and
other market participants in relation to the problems undergirding
these complaints, as well as the effectiveness, workability, and
economic impacts of several potential solutions identified. Relevant
data, information, and opinions to explain those views are all welcome.
This request for comment is principally focused on what could be done
by AMS's Packers and Stockyards Division (PSD) under the authority of
the Packers & Stockyards Act of 1921, as amended (7 U.S.C. 181 et
seq.). AMS is also interested, however, in commenters' views on any
other authorities that USDA could deploy. These could include efforts
in connection with other authorities or offices of USDA--such as the
Office of the Chief Economist (OCE)--which provide market-relevant
information or analysis. Comments received in response to this ANPR
will inform AMS's approach to regulating the Nation's fed cattle
markets.
II. Background
A. Trading Practices in the Fed Cattle Industry
The United States' fed cattle industry involves multistage
ownership, regional variability, and a variety of different contracting
and trading practices. Careful attention to this range of factors is
essential to successfully promoting fairer, more competitive markets
for all producers. In this ANPR, the term ``fed cattle'' refers to
cattle raised and fed for slaughter as beef or beef by-products; the
term ``packer'' refers to the entities
[[Page 82520]]
that purchase and then slaughter fed cattle for use as beef or other
meat by-products. Currently, the fed cattle industry is characterized
by a high degree of packer concentration and predominant use of formula
pricing agreements to market fed cattle.
In the first half of the 20th century, producers sold cattle to
packers at terminal stockyards. Sellers consigned cattle with one of
the commission firms operating at the stockyard, which then negotiated
the sale and collected a commission from the seller. Stockyards also
served to aggregate livestock from widely dispersed areas. This
centralization allowed packers to purchase the quantities necessary to
operate their plants from one location, where the presence of many
buyers together in one place likely improved competition because
producers could sell to multiple, competing packers.
During the latter half of the 20th century, the cattle feeding
industry emerged in the Plains states, near areas of feed production
and weather conditions suitable for cattle feeding. Packing plants
relocated to areas near the cattle feeders, and the industry shifted
from terminal stockyards to decentralized marketing through local
auctions \1\ or, more commonly, a ``bid and ask'' system of direct
negotiations between packers and cattle feeders (in other words, cash
negotiations for live animals). In this cash or ``spot'' market, the
price for cattle is negotiated between a fed cattle producer and a
packer at the time of sale, in other words, ``on the spot.'' \2\ In
healthy trading markets with multiple buyers, packers must compete with
one another to purchase cattle.
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\1\ Although they served as an important outlet for marketing
fed cattle as terminal markets declined, local auctions now
primarily market feeder and cull cattle. A relatively small number
of fed cattle continue to be sold through live and video auctions.
\2\ The spot market technically refers to all transactions in
the physical commodity, as opposed to transactions for a derivative
thereof, such as a future. Cash negotiated transactions can also be
on a dressed basis, where payment is made based on the carcass
weight rather than live weight.
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In the 1990s and early 2000s, the beef cattle industry began to
move toward quality differentiation and ``value-based marketing,'' in
which price premiums and discounts were applied for quality grade
differences of harvested cattle using a ``grid'' matrix.\3\ Under these
arrangements, packers offer a different price for each individual head,
which is determined post-slaughter by offering a base price plus a
premium or discount for a number of carcass attributes such as quality
grade, yield grade, and weight. Some even offer price premiums for
certain production practices such as antibiotic-free feeding. These
arrangements contrast with traditional cash negotiations or auction
sales, where the buyer would bid a single price per pound for an entire
lot. Eventually, these new arrangements came to be known as Alternative
Marketing Arrangements (AMAs). See Figure 1, which contains a graphic
showing various types of fed cattle marketing arrangements.
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\3\ See Peel, Derrell S. ``How We Got Here: A Historical
Perspective on Cattle and Beef Markets,'' in The U.S. Beef Supply
Chain: Issues and Challenges, Ed. by B.L. Fisher et al., Texas A&M
University, June 3-4, 2021.
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BILLING CODE 6001-FR-P
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[GRAPHIC] [TIFF OMITTED] TP11OC24.011
BILLING CODE 6001-FR-C
Formula agreements are the most common AMAs. Formula prices are
determined using a base or reference price, such as the reported live
negotiated price from the cash or spot market for the week prior to
delivery. Although not always made in writing, formula agreements
commonly include an express or implied agreement to purchase all the
producer's cattle. A ``grid'' of premiums and discounts is then applied
to the base price.
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\4\ Source: Muth, M.K., J. Del Roccili, M. Asher, J. Atwood, G.
Brester, S.C. Cates, M.C. Coglati, S.A. Karns, S. Koontz, J.
Lawrence, Y. Liu, J. Marsh, B. Martin, J. Schroeter, J. L. Taylor,
and C. L. Viator. 2007. GIPSA Livestock and Meat Marketing Study,
Volume 3: Fed Cattle and Beef Industries. Research Triangle Park,
NC: RTI International for USDA Grain Inspection, Packers and
Stockyards Administration. 1-16.
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Over the past 20 years, the use of formula agreements has increased
relative to negotiated cash agreements, and around 2010, formula
agreements became the dominant method of sale. As shown in Figure 2, in
2005, beef packers acquired roughly 55 percent of their cattle through
cash negotiations and 30 percent through formula agreements. By March
2021, the same analysis found cash negotiations accounted for about 20
percent of cattle purchases, and formula agreements accounted for 65
percent. These statistics reflect the state of cattle marketing
nationally; however, in three out of the country's five USDA-designated
cattle procurement regions, the cash negotiated share is significantly
lower than 20 percent, reaching as low as 12.5 percent of total cattle
sales in the Kansas (KS) region, 8.3 percent in the Colorado (CO)
region, and 2.6 percent in the Texas-Oklahoma-New Mexico (TX-
[[Page 82522]]
OK-NM) region. In contrast, the Iowa-Minnesota (IA-MN) region has
reliably maintained cash-market procurement of 50 percent or more of
marketed cattle, in part reflecting the prevalence of smaller ``farmer-
feeders.'' Nebraska (NE) region's percentage has hovered between 30 and
40 percent. The higher prevalence of cash market transactions in IA-MN
and NE may reflect a range of reasons, including producer preference
for cash negotiated transactions, the size and number of sellers, and
smaller lot sizes limiting the bargaining power of those producers in
securing more favorable terms through AMAs.\5\ These trends are
discussed at greater length later in this ANPR, including in Figures 2
and 3 below.
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\5\ The size of feedlots, which constitute the vast majority of
cattle sales to packers, differs considerably by state. In Texas and
Kansas, the average number of head that a feedlot sold in 2022 was
12,851 and 5,694, respectively. In contrast, the averages in Iowa
and Minnesota were 441 and 237, respectively. National Agricultural
Statistics Service, 2022 Census of Agriculture.
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Producers' views on formula agreement AMAs (hereinafter, AMAs refer
to formula agreement AMAs unless otherwise noted) can vary widely, and
sometimes sharply. Producers that use AMAs commonly note they generally
offer convenience, cost-savings, and certainty, which is valuable in
securing financing.<SUP>6 7</SUP> Other producers, especially smaller
producers commonly referred to as independents, more strongly value
attributes in the cash market, such as the ability to negotiate on
price with multiple packers in real time during a given week and to
lock in that price at the time of sale, rather than relying on the
application of a grid after slaughter. Independent producers have also
expressed concern that the use of AMAs allows packers to avoid
competition and exploit their market power and therefore broadly
suppresses cattle prices. Some assert that packers engage in strategic
behavior to control or manipulate the cash market for fed cattle,
including going in and out of cash markets or otherwise changing their
bidding practices, owing to the linkage between the AMA's base price
and the underlying cash market.\8\ Some also argue that the decline in
demand for cash transactions reduces bidding in the cash market, which
can adversely affect competition--a problem commonly referred to as
``captive supply.'' \9\
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\6\ Id.
\7\ Kades Report at 24.
\8\ See, for example, Giles Stockton, ``There is a Solution,''
2017, <a href="https://www.worc.org/cattle-market/">https://www.worc.org/cattle-market/</a>; Western Organization of
Resource Councils (WORC), Petition for Rulemaking, 62 FR 1845
(1997); In addition, even packer leadership noted some of these
concerns. See, e.g., C. Robert Taylor, ``Harvested Cattle,
Slaughtered Markets?'' (April 27, 2022) Available at <a href="https://ssrn.com/abstract=4094924">https://ssrn.com/abstract=4094924</a>, pgs. 25, 29 (quoting and citing Bob
Peterson, CEO of IBP), infra.
\9\ See, e.g., Bill Bullard, ``Chronically Besieged: The U.S.
Live Cattle Industry,'' Presented at Big Ag & Antitrust Conference,
Thurman Arnold Project at Yale, Jan. 2021; U.S. Department of
Justice & U.S. Department of Agriculture, Public Workshops Exploring
Competition in Agriculture, Livestock Industry Agenda, August 27,
2010, Fort Collins, Colorado, available at <a href="https://www.justice.gov/archives/atr/event/ag-workshops-livestock-industry-agenda">https://www.justice.gov/archives/atr/event/ag-workshops-livestock-industry-agenda</a> (accessed
7/18/2024); C. Robert Taylor and David A. Domina, ``Restoring
Economic Health to Beef Markets,'' Aug. 25, 2010, available at
<a href="https://www.dominalaw.com/documents/Restoring-Economic-Health-to-Beef-Markets.pdf">https://www.dominalaw.com/documents/Restoring-Economic-Health-to-Beef-Markets.pdf</a>.
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A critical factor underlying producer concerns around AMAs is the
continuing market concentration in meat packing, which, at the regional
level, has been both high and persistent. The DOJ Consent Decree of
1920, which secured a broad injunction enjoining dominant packers from
consolidation and vertical integration, came to an end in 1981,\10\
thus permitting packers to merge. Some additional vertical integration
occurred during the 1980s between packers and feedlots, in part owing
to deregulation of the P&S Act. However, in the 2000s the largest
packers divested their feedlot operations. The question of closer
relations between packers and feedlots today largely centers around
questions of preferences in contractual terms, such as financing, risk-
sharing, and profit-sharing. The AMS Cattle Contract Library (CCL)
Pilot collects data on whether packers have financing, risk-sharing or
profit-sharing terms.\11\ Whether the CCL Pilot discloses terms would
depend upon a confidentiality analysis. However, no such terms have
been reported to AMS under the CCL Pilot, either at inception in
January 2023 or to date as confirmed again this year.
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\10\ United States v. Swift & Co., No. 58 C 613, 1981 WL 2171,
at *1 (N.D. Ill. Nov. 23, 1981); see also Aduddell, Robert M. and
Louis P. Cain. ``Public Policy Toward `The Greatest Trust in the
World'.'' Business History Review, vol. 55 (1981), pp. 217-42.
\11\ Authorized by the Consolidated Appropriations Act of 2022
(Pub. L. 117-103). Implementing rule, ``Cattle Contracts Library
Pilot Program,'' 87 FR 74951 (December 7, 2022).
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Between 1980 and 1995, the percentage of fed cattle slaughtered by
the four largest packers (the four-firm concentration ratio or CR4)
rose from 35.7% to 79.3%.\12\ In other words, by the mid-1990s the four
largest packers in the fed cattle industry controlled of almost 80% of
all fed cattle slaughtered in the U.S. Notably, national concentration
levels mask the impacts at the regional level. While four packers may
compete directly in national grocery chain markets, producers commonly
have even fewer packers to transact with in their regional markets.
Based on AMS's experience conducting investigations and monitoring
markets, there are commonly only one or two buyers in some local
geographic markets, and few sellers have the option of selling fed
cattle to more than three or four packers. In Colorado, for example,
AMS Market News cattle price reports are usually withheld because two
packers account for most purchases and Market News guidelines require
at least three packers to be active in the reporting period to disclose
price data.
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\12\ Azzedine M. Azzam & Dale G. Anderson, USDA, Grain
Inspection Packers and Stockyards Administration, Packers and
Stockyards Statistical Report: 1995 Reporting Year, GIPSA 97-1,
1996, <a href="https://www.ers.usda.gov/webdocs/publications/47232/17820_tb1874h_1_.pdf?v=0">https://www.ers.usda.gov/webdocs/publications/47232/17820_tb1874h_1_.pdf?v=0</a> (accessed 7/3/24).
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The Herfindahl-Hirschman Index (HHI) is a standard used to measure
industry concentration,\13\ and current U.S. Department of Justice and
Federal Trade Commission Merger Guidelines state that ``markets with an
HHI greater than 1,800 are highly concentrated.'' \14\ At a national
level, the HHI for fed cattle packing was 1,687 in 2021, but in some
regional markets the HHI exceeded 3,000. Although the regional areas
defined for Market News reporting do not perfectly define the extent of
regional markets and may therefore overstate or understate
concentration to some degree, these regional HHI measurements are
nevertheless revealing of limited competition. Annual adjusted regional
HHIs as of 2021 ranged between 2,200-2,400 in Kansas and Nebraska and
over 3,200 in Texas-Oklahoma-New Mexico.\15\
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\13\ The HHI is calculated by summing the squares of the
individual firms' market shares. PSD calculates the HHI of market
concentration for packers from the individual packer's market shares
based on Annual Commercial Slaughter totals. See Agricultural
Marketing Service, USDA, Packers and Stockyards Division: Annual
Report 2021 & 2022, pg. 14, <a href="https://www.ams.usda.gov/sites/default/files/media/PackersandStockyards2021_2022ReporttoCongress.pdf">https://www.ams.usda.gov/sites/default/files/media/PackersandStockyards2021_2022ReporttoCongress.pdf</a>.
\14\ Antitrust Division, U.S. Department of Justice, 2023 Merger
Guidelines, December 18, 2023, <a href="https://www.justice.gov/atr/2023-merger-guidelines">https://www.justice.gov/atr/2023-merger-guidelines</a> (last accessed 7/17/2024).
\15\ Agricultural Marketing Service, USDA, ``Agricultural
Competition: A Plan in Support of Fair and Competitive Markets,''
May 2022, p. 4, available at <a href="https://www.ams.usda.gov/sites/default/files/media/USDAPlan_EO_COMPETITION.pdf">https://www.ams.usda.gov/sites/default/files/media/USDAPlan_EO_COMPETITION.pdf</a>.
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In response to concerns that ongoing packer concentration and the
rise of AMAs were negatively impacting transparency in the cash
markets, Congress passed the Livestock Mandatory Reporting Act of 1999
(Pub. L. 106-78, title IX).\16\ The law enhances
[[Page 82523]]
transparency and accuracy in reporting by requiring covered packers to
report all livestock and meat transactions to AMS, which then must
compile the reports and make them publicly available, subject to
appropriate confidentiality protections.\17\ USDA implemented this
statute by establishing the Livestock Mandatory Reporting (LMR) program
(65 FR 75464, December 1, 2000; and 66 FR 8151, January 30, 2001
(postponing the rule's effective date)).\18\ The LMR program provides
weekly reports on ``livestock and meat price trends, contracting
agreements, and supply and demand conditions.'' \19\ The Regulatory
Impact Analysis Summary of Benefits of the LMR implementing rule
described how mandatory price reports would serve as benchmark prices
(also called base prices or reference prices) for formula agreements,
and thus enhance price discovery in the face of declining negotiated
cash transactions in the cattle industry.\20\
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\16\ See, for example, Summary in Congressional Research
Service, ``Reauthorization of the Livestock Mandatory Reporting
(LMR) Act in the 114th Congress.'' November 20, 2015, <a href="https://crsreports.congress.gov/product/pdf/R/R44025/4">https://crsreports.congress.gov/product/pdf/R/R44025/4</a>, last accessed 8/14/
2024.
\17\ The Secretary of Agriculture was directed to establish,
among other things, a cattle marketing information program that
would ``provide[s] information that can be readily understood by
producers, packers and other market participants, including
information with respect to the pricing, contracting for purchase,
and supply and demand conditions for livestock, livestock
production, and livestock products.'' (7 U.S.C. 1635 Purpose).
\18\ The program is renewed periodically per statute. It was
renewed most recently by the Consolidated Appropriations Act of
2024, which extended LMR authority to September 30, 2024 (Pub. L.
118-42).
\19\ AMS Livestock Mandatory Reporting Background, https://
www.ams.usda.gov/rules-regulations/mmr/lmr/
background#:~:text=On%20April%202%2C%202001%2C%20the%20USDA%E2%80%99s
%20Agricultural%20Marketing,sales%20of%20livestock%20and%20livestock%
20products%20to%20AMS (accessed 7/3/24).
\20\ 65 FR 75464, 75490 (December 1, 2000).
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Following the implementation of LMR and the associated increase in
price transparency, packers widely adopted LMR-based reference prices
as base prices in AMAs due to the widespread trust in LMR-based price
reports. However, as more cattle were purchased under AMAs, the
percentage of cattle purchased on the spot market declined, leaving the
regional cash markets heavily used as AMA base price benchmarks with
fewer spot transactions to draw from. (Note, different LMR reports will
cover different transactions; some focus on a regional cash trade,
while others show AMA transactions with various degrees of aggregation
or confidentiality. All transactions are reported in some way,
including AMA purchases). LMR has greatly expanded transparency in fed
cattle markets overall, which is critical for all producers, but its
authorities are not designed to address the use of LMR reports by
market participants in contracts and the competitive impacts on the
broader markets from doing so.
In the last two decades, the fed cattle market has become even more
reliant on formula pricing agreements. In 2008, formula pricing
agreements accounted for 34.4% of fed cattle purchases, while spot
market transactions accounted for 50.5%.\21\ By 2021, formula pricing
agreements accounted for 61% of fed cattle procurement, while spot
market (i.e., cash negotiated live and dressed) transactions accounted
for 19%.\22\ This shift to formula pricing agreements varies by region,
with relatively low usage in the Northern Midwest (which is more
commonly characterized by smaller ``farmer-feeder'' operations where
cash negotiated transactions still account for 40-50% of sales) and
very high usage in Texas and Kansas (where larger ``corporate''
feedlots are the norm and cash negotiated transactions are as low as 6-
10%). See Figure 2. Some regions, notably Texas and Kansas, saw the
number of cattle transacted in the cash market approach zero in some
weeks. See Figure 3.
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\21\ 2012 Annual Report, Packers and Stockyards Program, pg. 39,
<a href="https://www.ams.usda.gov/sites/default/files/media/2012_psp_annual_report.pdf">https://www.ams.usda.gov/sites/default/files/media/2012_psp_annual_report.pdf</a> (accessed 7/3/2024).
\22\ Packers and Stockyards Division: Annual Report 2021 & 2022,
p. 19, <a href="https://www.ams.usda.gov/sites/default/files/media/PackersandStockyards2021_2022ReporttoCongress.pdf">https://www.ams.usda.gov/sites/default/files/media/PackersandStockyards2021_2022ReporttoCongress.pdf</a>.
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BILLING CODE P
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[[Page 82525]]
[GRAPHIC] [TIFF OMITTED] TP11OC24.013
BILLING CODE C
Although it varies from plant to plant and region to region, the
cash market can now be considered a residual market \23\ where packers
fill in gaps in
[[Page 82526]]
their supply needs not otherwise served first by cattle purchased with
AMAs. Thin markets--meaning those with few purchasers or limited
trading volume or liquidity--have received attention from policymakers
because of concerns that processing firms could depress farm-level
prices below those that would prevail in a competitive market. Cash
markets and, in particular, the regional cash negotiated live markets,
continue to serve as the primary price discovery vehicle for all cattle
traded. Data from USDA's CCL Pilot shows that more than 75% of
contracts analyzed rely on an AMS Market News price report to determine
the base price used in the contract.\24\ Moreover, the CCL Pilot
revealed that more than 90% of those contracts use one of three
regional cash markets--negotiated cash purchases in Nebraska, Kansas,
or Texas-Oklahoma-New Mexico--to price their cattle. These AMA contract
base prices almost always use the reported average from the previous
week's cash trade.
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\23\ Adjemian, Michael K., Tina L. Saitone, and Richard J.
Sexton. 2016. ``A Framework to Analyze the Performance of Thinly
Traded Agricultural Commodity Markets'' Amer. J. Agr. Econ. 98(2):
581-596; and Koontz, Steven R. 2015. ``Marketing Method Use in Trade
of Fed Cattle: Causes and Consequences of Thinning Cash Markets and
Potential Solutions'' Invited Paper American Applied Economics
Association and Western Agricultural Economics Association Joint
Annual Meeting, June 2015.
\24\ <a href="https://mymarketnews.ams.usda.gov/Cattle_Contract_Library">https://mymarketnews.ams.usda.gov/Cattle_Contract_Library</a>
(accessed 7/3/2024). The CCL Pilot presents these base prices as
``options'' in the contract. About 11 percent small percent of
contracts contain an CME Live Cattle Futures Market option for a
base. Less than 10 percent have a negotiated option, while less than
4 percent have a ``top of the market'' option. Some contacts may use
more than one option: for example, a contract may set out that a
negotiated option is to be utilized when one or more of the LMR-
reported base price region fails to hit a targeted volume of cash
trade in the week.
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Those trading in the negotiated cash market--who are, generally,
smaller producers without AMAs--generally absorb weekly fluctuations in
packer demand. Cash markets are commonly viewed as a residual market,
as packers usually prioritize AMA purchases to fill plant needs first.
The relationship of the variation week-to-week in numbers of cattle
purchased through negotiated cash and formula methods differs between
regions. Notably, the difference in measured variation between the two
markets is markedly lower in Iowa and Nebraska, and markedly higher in
Texas-Oklahoma-New Mexico and in Kansas.\25\ Figure 4 displays a ratio
between the coefficients of variation (CV) calculated annually for
number of cattle sold weekly through negotiated cash and formula
purchase methods in each region as a measure of relative variability. A
CV ratio equal to one indicates equal variability, and higher values of
the ratio indicate greater variability of quantities purchased in the
negotiated cash market relative to formulas. The figure shows that in
recent years CV ratios have been consistently higher in the Kansas
region and the Texas, Oklahoma, and New Mexico region where formula
methods predominate. Although there could be reasons for the
differences other than thin markets, the figure below is consistent
with the idea that as regional negotiated cash markets become thinner,
cash sellers in those markets face increasing volatility and
uncertainty in marketing their cattle relative to those selling with a
formula.
---------------------------------------------------------------------------
\25\ Taylor, C.R. ``Risk Shifting via Partial Vertical
Integration: Beef Packers' Acquisition of Slaughter Cattle,''
November 2022, <a href="https://ssrn.com/abstract=4276805">https://ssrn.com/abstract=4276805</a>.
[GRAPHIC] [TIFF OMITTED] TP11OC24.014
Additionally, AMA base prices established using cash negotiated
market price reports simply reflect the quality or specification of
cattle that were traded during the week in the reporting area. Most AMA
formulas use prices that weight the average weekly prices by number of
head but do not standardize or weight the cattle to a particular
quality grade (for example, USDA Choice--Yield Grade 3, etc.). That is
to say, the base price simply reflects the numerical average of the
prices of whatever qualities of cattle appear in the market that week;
[[Page 82527]]
however, the value of cattle--and thus the prices--can vary greatly
depending on quality.\26\ The benchmarks, therefore, are vulnerable to
fluctuation based on the different types of cattle sold in the market.
It is commonly understood that different states reflect different
qualities of quality, and that producers will seek to use base prices
for regions that reflect their own cattle trading strategy. Yet the
benchmark remains inherently vulnerable to changes in the quality that
appear during a given week.
---------------------------------------------------------------------------
\26\ Note, previous academic studies have highlighted the
potential value of augmenting the amount of information reported and
collected on fed cattle premiums and discounts. Ted C. Schroeder,
Brian K. Coffey, and Glynn T. Tonsor, ``Hedonic Modeling to
Facilitate Price Reporting and Fed Cattle Market Transparency,''
Applied Economic Perspectives and Policy vol 45(3), Jan. 2022, p.
1716.
Sheppard G. Rogers, Ted C. Schroeder, Glynn T. Tonsor, and Brian
K. Coffey, ``Describing Variation in Formula Base Prices for U.S.
Fed Cattle: A Hedonic Approach,'' Journal of Agricultural and
Applied Economics vol 55(1), Feb. 2023 p. 117.
---------------------------------------------------------------------------
Tying the price of AMA cattle to the cash negotiated market price
without a quality specification also creates unusual incentives that
may distort cattle trading. The packer, for example, may seek to avoid
cattle with higher quality specifications that would raise the price of
its AMA formula cattle, or to underpay for such cattle. AMS has heard
reports that packers may find other ways to trade that keep
transactions out of the relevant region's cash market (and hence not
affect the relevant AMA base price) for similar reasons.\27\ These AMA
base price benchmark practices contrast with the Chicago Mercantile
Exchange's (CME's) Live Cattle Futures, which is tied to particular
specifications for a lot of cattle. Cattle of all range of quality and
type may still trade in the spot market at whatever value or premium
that packers and producers agree upon, but the futures market is
grounded in a clear, transparent basket of cattle for valuation and
transparency purposes. AMS understands that packers will internally
weight or standardize all purchases to a particular quality grade,
usually USDA Choice--Yield Grade 3, so that the packer can measure its
procurement efficiency even while permitting cattle quality to vary.
---------------------------------------------------------------------------
\27\ Types of transactions that are not included in Livestock
Mandatory Reporting (LMR) include those for which confidentiality is
not met (such as frequently occurs in the Colorado region), or
information is not required to be submitted (such as auction
purchases). See Livestock Mandatory Reporting Excluded Transaction
Summaries: <a href="https://www.ams.usda.gov/rules-regulations/mmr/lmr/excluded-transactions">https://www.ams.usda.gov/rules-regulations/mmr/lmr/excluded-transactions</a>.
---------------------------------------------------------------------------
B. Longstanding Concerns and Market Shocks
For over 20 years, a range of producers have complained about the
unfairness of the prices they are paid for fed cattle arising out of
the relationship between AMAs and the regional cash markets that form
their base price. Producers have highlighted adverse impacts on trading
behavior, fewer and commonly lower bids on cattle, difficulty
attempting to negotiate with packers, increased pricing and sales risk
in the cash market overall, and packer pickup problems, among other
concerns. Some producers assert a predatory pricing strategy to lock up
the industry among only favored players. They also fear the loss of
independence and further vertical integration as has occurred in other
protein species. However, the boldest reform attempts to date have not
met with success.
As early as 1996, the Western Organization of Resource Councils
(WORC), a federation of grassroots organizations, submitted a petition
to the Secretary of Agriculture to issue rules that would restrict the
use of forward contracts and packer ownership of cattle, including a
prohibition on the use of base prices that reference a future, as yet
unknown, price.\28\ WORC put forth this petition out of concern that
forward contracts using formulas for the base price encourage
manipulation of cash fed cattle markets to lower formula base prices.
Also, the petition asserted that higher quality cattle are sold on a
formula basis, even as the base price for such sales are set on the
negotiated cash market, where cattle are lower quality. The petition
asserted that the combination of incentives leads to lower fed cattle
prices on negotiated cash markets and to lower formula prices than
would be the case if cattle purchasing was conducted in a more
competitive, open manner.
---------------------------------------------------------------------------
\28\ Petition submitted to USDA on October 8, 1996; published by
USDA in the Federal Register, 62 FR 1845, January 14, 1997.
---------------------------------------------------------------------------
Complaints about AMAs were central to many of the reforms that were
considered during the 2008-2010 period, including both the 2008 Farm
Bill's provision on ``undue preferences'' and subsequent efforts by
USDA to write rules under the P&S Act in 2010.\29\ More recently, in
2014, USDA's then Grain Inspection, Packers and Stockyards
Administration (GIPSA) completed an investigation into complaints from
cattle industry participants regarding possible anticompetitive
behavior by the four largest packers, in part due to the packers' use
of formula pricing agreements (which are referred to in the report as
AMAs).\30\ Complainants asserted to USDA that packers are able to lower
prices in the cash market and thus impact prices paid under AMAs by (1)
buying fewer cattle on a cash basis, which results in thinner volumes;
(2) making unreasonably low bids (or bidding less aggressively, making
``take it or leave it'' short-term pressure bids); and (3) only
offering market-based price bids once a lower market price is
established. The investigation found that, ``on a week-to-week basis,
higher levels of AMA procurement [as a percentage of slaughter
capacity] were associated with lower negotiated cash prices.'' \31\
This suggests that cash or spot market prices are more likely to be
depressed in weeks when packers rely more heavily on AMA procurement to
fill slaughter needs. Yet the report focused on AMAs as a whole, rather
than on base price selection, and found that AMAs ``have significant
economic benefits,'' including for packers, consumers, and fed cattle
producers.'' \32\ Reported benefits to packers included a reduction in
transaction costs; benefits to consumers included improvement in beef
quality, and benefits to cattle feeders, included a reduction in
transaction costs, assurance of timely market access, and reduction in
the price risk associated with raising and selling fed cattle. AMS does
not, however, endorse cross-market balancing, as benefits and harms
should only be considered within a market.
---------------------------------------------------------------------------
\29\ See title XI of the Food, Conservation and Energy Act of
2008 (2008 Farm Bill) (Pub. L. 110-246); see also, U.S. Department
of Justice & U.S. Department of Agriculture, Public Workshops
Exploring Competition in Agriculture, Livestock Industry Agenda,
August 27, 2010, Fort Collins, Colorado, available at <a href="https://www.justice.gov/archives/atr/event/ag-workshops-livestock-industry-agenda">https://www.justice.gov/archives/atr/event/ag-workshops-livestock-industry-agenda</a> (accessed 7/18/2024); see also 75 FR 35338, June 22, 2010;
see also, e.g., C. Robert Taylor and David A. Domina, ``Restoring
Economic Health to Beef Markets,'' Aug. 25, 2010, available at
<a href="https://www.dominalaw.com/documents/Restoring-Economic-Health-to-Beef-Markets.pdf">https://www.dominalaw.com/documents/Restoring-Economic-Health-to-Beef-Markets.pdf</a>.
\30\ USDA, GIPSA, Packers and Stockyards Program, Western
Regional Office, Investigation of Beef Packers' Use of Alternative
Marketing Arrangements, July 2014, <a href="https://www.r-calfusa.com/wp-content/uploads/2020/07/200721-2014-GIPSA-Investigation-of-Cattle-Market.pdf">https://www.r-calfusa.com/wp-content/uploads/2020/07/200721-2014-GIPSA-Investigation-of-Cattle-Market.pdf</a> (accessed 7/3/2024).
\31\ Id., pg. i.
\32\ Id., pg. ii.
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Smaller producers selling in the negotiated cash market have
complained to USDA for many years about unfair practices leading to
lower prices in the cash markets and so-called ``sweetheart deals'' in
the form of AMAs, where the AMA-receiving producer secured pricing
better than that secured in cash negotiated markets
[[Page 82528]]
for the same quality cattle.\33\ Part of the concern from these
producers is that they engage in the work of price discovery--the
risks, the costs, the inability to place cattle, etc.--yet are not
compensated for those costs and risks, as AMA formulas incorporate
whatever the cash negotiated price is into the AMA.\34\ Moreover, as
revealed by the CCL Pilot, AMA contracts commonly pay adjustments above
the base price, although the ultimate economics of the agreement
depends upon the premiums and discounts. To the extent that packers
seek to lower their procurement costs by only purchasing lower quality
cattle within relevant markets, or through exercising softer bidding or
other trading practices, producers selling in cash markets would also
experience harms compared to AMA holders, who receive upwards
adjustments in the base price beyond the LMR prices \35\ along with
quality bonuses based on the grid.
---------------------------------------------------------------------------
\33\ See, e.g., Bill Bullard, ``Chronically Besieged: The U.S.
Live Cattle Industry,'' Presented at Big Ag & Antitrust Conference,
Thurman Arnold Project at Yale, Jan. 2021; Bill Bullard, ``Under
Siege: The U.S. Live Cattle Industry,'' S. Dakota L. Rev., 2013;
2010 GIPSA Hearings; Taylor, Legal and Economic Issues (supra).
\34\ For more on the costs/risks and collective action problems
associated with price discovery, see Darrell Peel, David Anderson,
et al, ``Fed Cattle Price Discovery Issues and Considerations,''
Oklahoma State University Extension, (E-1053), Nov. 2020, available
at <a href="https://extension.okstate.edu/fact-sheets/print-publications/e/fed-cattle-price-discovery-issues-and-considerations-e-1053.pdf">https://extension.okstate.edu/fact-sheets/print-publications/e/fed-cattle-price-discovery-issues-and-considerations-e-1053.pdf</a> and
John D. Anderson, James L. Mitchell, and Andrew M. McKensie,
``Analysis of the Cattle Price Discovery and Transparency Act of
2021, University of Arkansas (FC-2022-001), Jan. 2022, available at
<a href="https://wordpressua.uark.edu/fryar-center/files/2023/02/CPDTA-analysis-01.18.22.pdf">https://wordpressua.uark.edu/fryar-center/files/2023/02/CPDTA-analysis-01.18.22.pdf</a>.
\35\ For the first half of 2024 34.2% of all contracts in the
Cattle Contract Library Pilot dashboard received base price
adjustments. During the same time frame, the average base price
adjustment for contracts that used USDA Market News LMR data to
determine a base price and applied quality premiums and discounts
made an average base price adjustment of $1.10/cwt before quality
premiums and discounts were applied.
---------------------------------------------------------------------------
Concerns raised by producers regarding concentration and
insufficient price discovery came to a head as a result of a series of
market shocks in 2019 and 2020. The first arose following the closure
of one processing plant, which, due to the plant's size, impacted the
entire industry. On August 9, 2019, a beef packing plant in Holcomb,
Kansas closed after extensive damage from a fire.\36\ The plant was
responsible for 5 to 6% of the Nation's beef processing capacity.\37\
Though the plant's owner quickly transferred cattle to its other
facilities,\38\ an AMS investigation found significant economic impacts
resulted from the fire. With respect to pricing, for the week ending
August 24, 2019, the spread (the difference between the average price
packers paid to cattle producers for fed cattle and the average price
paid by wholesale beef buyers for USDA Choice grade beef) was $67.17,
representing a 143% increase from the average spread between 2016 and
2018.\39\ Though this eventually stabilized, the spread remained above
2016-2018 levels.\40\ With respect to trading, AMS found that in the
aftermath of this crisis, sales in the spot market decreased while
formula trading increased: in the week after the fire, spot market
trading decreased by 27%, while formula trading increased by 15,000
head of fed cattle.\41\ This is significant because, as noted above in
this ANPR's overview of the fed cattle industry, more than 75% of
formula pricing agreements base the price paid for cattle on prices
paid in the spot market. Therefore, the nature of the trading that is
conducted in the spot market--for example, the number of packers
competing against one another to bid on the price paid for cattle,
whether those trades are public, and the quality of information
disclosed publicly--heavily impacts the amount paid for cattle under
formula pricing agreements. As AMAs are commonly exclusive with an
express or implied obligation that the packer will take all of the
producer's cattle, market shocks such as this more heavily impact
trading in spot markets, leaving those producers unable to timely sell
their cattle.
---------------------------------------------------------------------------
\36\ Michael Nepveux, American Farm Bureau Federation, ``Impacts
of the Packing Plant Fire in Kansas,'' September 10, 2019, <a href="https://www.fb.org/market-intel/impacts-of-the-packing-plant-fire-in-kansas">https://www.fb.org/market-intel/impacts-of-the-packing-plant-fire-in-kansas</a>
(accessed 7/5/2024).
\37\ USDA, AMS, ``Boxed Beef & Fed Cattle Price Spread
Investigation Report,'' July 22, 2020, <a href="https://www.ams.usda.gov/sites/default/files/media/CattleandBeefPriceMarginReport.pdf">https://www.ams.usda.gov/sites/default/files/media/CattleandBeefPriceMarginReport.pdf</a>
(accessed 7/5/2024).
\38\ Nepveux, ``Impacts of the Packing Plant Fire in Kansas.''
\39\ ``Boxed Beef & Fed Cattle Price Spread Investigation
Report,'' pg. 3.
\40\ Id. at pg. 5.
\41\ Ibid.
---------------------------------------------------------------------------
The COVID-19 pandemic also impacted pricing, trading, and the beef
supply chain, but even more severely. By late March of 2020, slaughter
rates fell as workers fell sick and plants closed, and consumer demand
surged, shifting from restaurant demand to retail
demand.<SUP>42 43 44</SUP> Fed cattle purchases declined, as did fed
cattle prices.\45\ An AMS investigation found that, ``[f]rom the
beginning of April until the third week of May, the spread rose from
approximately $66/cwt. to just over $279/cwt., an increase of
approximately 323 percent . . . and the largest spread between the
price of fed cattle and the price of boxed beef since the inception of
Mandatory Price Reporting in 2001.'' \46\ The investigation found that,
although the spread fell in subsequent months, it remained high by
historical standards. A year later, cattle producers were still
suffering economically while packers profited as COVID-19 kept plants
at reduced capacity for an extended period: in its July 2021
Congressional testimony, a cattle trade association reported that
``gross packer margin . . . exceeded $1,000 per head'' while fed cattle
producers across the nation ``struggled to break even.'' \47\ During
this time, ``[o]n average, estimated returns for cattle producers were
below cost of production.'' \48\
---------------------------------------------------------------------------
\42\ Kate Vaiknoras, et. al., USDA, ERS, ``COVID-19 Working
Paper: COVID-19 and the U.S. Meat and Poultry Supply Chains,''
February 2022, <a href="https://www.ers.usda.gov/webdocs/publications/103178/ap-098.pdf?v=8386.2">https://www.ers.usda.gov/webdocs/publications/103178/ap-098.pdf?v=8386.2</a> (accessed 7/5/2024).
\43\ J.E. Hobbs, ``The Covid-19 pandemic and meat supply
chains,'' Meat Sci, November 2021, <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9761612/">https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9761612/</a>, (accessed 7/5/2024).
\44\ ``Boxed Beef & Fed Cattle Price Spread Investigation
Report,'' pg. 9.
\45\ Ibid.
\46\ Id., pg. 9.
\47\ ``Beefing up Competition: Examining America's Food Supply
Chain'': U.S. Senate Committee on the Judiciary (July 28, 2021)
(Written Testimony of the Iowa Cattlemen's Association, <a href="https://www.judiciary.senate.gov/imo/media/doc/Schaben%20-%20Testimony.pdf">https://www.judiciary.senate.gov/imo/media/doc/Schaben%20-%20Testimony.pdf</a>
(accessed 7/5/2024)).
\48\ Ibid.
---------------------------------------------------------------------------
Cattle inventories continued to contract at the national level
after 2021, and widespread drought conditions contributed to the beef
cow herd reaching its lowest level in more than 60 years. Concurrent
with herd contraction, cattle prices had recovered, reaching record
highs during 2023 and 2024 and leading to estimated returns above cost
of production for producers.
In response to the disruptions caused by COVID and the closed plant
in Holcomb, Kansas, USDA has taken a wide range of measures to boost
resiliency and competitiveness in the meat supply chain, including
investing more than $1 billion into new local and regional meat
processing capacity.\49\ Yet, given the interdependent nature of the
fed cattle industry and the continuing level of concentration in the
beef industry, future packer crises may still have far-reaching pricing
and trading impacts. AMS believes that regulatory consideration of
trading market structures and practices must be part of any effort to
increase the resiliency and competitiveness, as well as fairness, of
the cattle pricing system
[[Page 82529]]
that undergirds our nation's meat supply.
---------------------------------------------------------------------------
\49\ AMS, ``Agricultural Competition,'' supra. See also
<a href="http://www.usda.gov/meat">www.usda.gov/meat</a> (last accessed July 2024).
---------------------------------------------------------------------------
An additional concern relates to when cattle sold on a liveweight
basis are picked up. Feedlots typically sell their animals when they
reach a weight that is considered ``finished,'' or ready for slaughter.
In most cases, the packer schedules a subsequent time to pick up the
purchased cattle, also known as ``calling for cattle.'' Feedlot sellers
incur ongoing costs of feed, yardage, etc., for cattle from the time of
sale until the buyer picks the animals up and takes them to the plant.
Although a seven-day pickup window is often considered standard
practice, sellers have reported packers waiting more than six weeks
after purchase before picking up cattle.
In major cattle feeding regions, a seven-day pick-up time has been
the accepted industry practice. After seven days have elapsed, it is
common practice for sellers to ``weigh-up'' cattle, which means
weighing them before putting them back on feed and shifting
responsibility for all future costs of feed, yardage, death loss, etc.,
to the packer. Weighing-up cattle helps clearly determine the value of
cattle that have been sold on a negotiated cash live weight basis. The
packer owes the seller an amount equal to the negotiated price
multiplied by weight at the time of the weighing-up. From that point
forward, the packer must pay all future costs for animal maintenance,
while also accruing the benefit of any weight gain that occurs after
the weigh-up.\50\ Notably, failure to pick up cattle in a timely manner
adds, in the view of some producers, to the packer's ``captive supply''
of cattle that reduces demand for bidding in the cash market.
---------------------------------------------------------------------------
\50\ In 2023, the National Cattlemen's Beef Association (NCBA)
adopted a similar resolution in favor of adopting a 7-day standard
for picking up cattle purchased on a negotiated cash basis, after
which cattle would be weighed up and the buyer would be responsible
for additional expenses. Policy handbook (p. 98) available at
<a href="https://www.ncba.org/Media/NCBAorg/Docs/2024-ncba-policy-book.pdf">https://www.ncba.org/Media/NCBAorg/Docs/2024-ncba-policy-book.pdf</a>
(last accessed 7/18/2024).
---------------------------------------------------------------------------
C. Academic Review and Other Regulatory Models
There exists a relatively large body of empirical research into
AMAs in livestock markets and fed cattle markets specifically. The
presentation of some research here is necessarily exemplary of the
available research and is not intended to reflect AMS's endorsement of
conclusions or even the relative balance of the presentation, be it
perceived as favorable or unfavorable to certain aspects of AMAs.
Early studies consistently found a small but significant negative
correlation between fed cattle prices and the number of cattle
purchased through AMAs from week to week. While these studies were
unable to prove conclusively that this negative correlation was due to
market power, the correlation has remained robust across
time.<SUP>51 52</SUP> A recent study found a continued statistically
significant negative correlation between spot fed cattle prices and
AMAs, and empirically demonstrates that increases in AMAs may have
contributed to an increase in the observed spread between the prices
that packers pay for cattle from feedlots and the value of the beef
they sell to retailers.\53\
---------------------------------------------------------------------------
\51\ Examples include among others Emmett Elam. 1992. ``Cash
Forward Contracting versus Hedging of Fed Cattle, and the Impact of
Cash Contracting on Cash Prices'' Journal of Agricultural and
Resource Economics, 17(1): 205-217.
Clement E. Ward, Stephen R. Koontz, and Ted C. Schroeder. 1998.
``Impacts from Captive Supplies on Fed Cattle Transaction Prices''
Journal of Agricultural and Resource Economics 23(2):494-514.
Schroeter John R. and Azzeddine Azzam. 1999. ``Econometric analysis
of fed cattle procurement in the Texas Panhandle'' Report to USDA,
Grain Inspection Packers and Stockyards Administration. Ji, In Bae
and Chanjin Chung. 2012. ``Causality Between Captive Supplies and
Cash Market Prices in the U.S. Cattle Procurement Market''
Agricultural and Resource Economics Review, 41/3 (Dec. 2012) 340-
350.
\52\ See, e.g., Garrido, F.G. and M. Kim, N.H. Miller, and M.C.
Weinberg. ``Buyer Power in the Beef Packing Industry: An Update on
Research in Progress,'' Report prepared for Washington Center for
Equitable Growth, March 30, 2022; C. Robert Taylor, ``Harvested
Cattle, Slaughtered Markets''; USDA, GIPSA, Packers and Stockyards
Program, Western Regional Office, Investigation of Beef Packers' Use
of Alternative Marketing Arrangements, July 2014, <a href="https://www.r-calfusa.com/wp-content/uploads/2020/07/200721-2014-GIPSA-Investigation-of-Cattle-Market.pdf">https://www.r-calfusa.com/wp-content/uploads/2020/07/200721-2014-GIPSA-Investigation-of-Cattle-Market.pdf</a> (accessed 7/3/2024).
\53\ Garrido, F., M. Kim, N.H. Miller, and M.C. Weinberg.
``Buyer Power in the Beef Packing Industry,'' January 2024, <a href="https://www.nathanhmiller.org/cattlemarkets.pdf">https://www.nathanhmiller.org/cattlemarkets.pdf</a> (accessed 9/25/2024).
---------------------------------------------------------------------------
A range of studies have explored the benefits of AMAs, almost
always looking at them holistically. McDonald and McBride and several
others have documented efficiency gains from contracting in livestock
markets. In the 2007 GIPSA Meat and Livestock Marketing Study, Muth et
al., found benefits to packers, cattle producers, and consumers.
Benefits to cattle producers were larger than any potential decrease in
prices to producers, whether due to market power or otherwise. AMAs
enable packers and feeders to make better use of their capacity,
further reducing costs, and reducing risk for producers as they know
they have a buyer for their cattle well in advance. AMS does not
endorse the type of cross-market balancing that would seek to justify
harms to smaller producers with benefits to larger producers. AMS does
not express an opinion in this ANPR regarding whether the conclusions
from these studies would still hold given significant market shifts
over the last 17 years, even if attempting to balance harms and
benefits to producers. Nor does AMS express an opinion on whether it
would utilize the same methodology used in earlier studies.
Researchers have also explored how AMAs and grid pricing have
changed risk and pricing signals between packers to producers.\54\ AMAs
use the grid to link pay premiums and discounts that are added to or
subtracted from base prices directly to valued characteristics of fed
beef cattle such as degree of marbling and yield of sellable meat.\55\
AMAs are also used to encourage production of some process-verified
cattle characteristics (including natural, organic, non-hormone
treated, grass-fed, or age and source verification) that require
increased coordination between beef producers and packer buyers. These
pricing incentives are clearly laid out for producers in contracts and
evaluated post-slaughter.\56\ That is, in contrast to a simple live
cash price paid before harvest as a single per pound rate for a group
of cattle ``on the hoof,'' AMAs typically link payment to carcass
performance after harvest (e.g., yield and quality grade) and other
value-added characteristics, including process verification.
Accordingly, the risks that the packer bears in cash markets through
its buyer agents' ability to identify and signal to producers the
importance of particular quality characteristics are borne by producers
in AMAs. In doing so, AMAs have been found to be more effective at
passing price signals from consumers--as identified by the packer--up
to
[[Page 82530]]
producers.\57\ Negotiated grid transactions, in which a firm base price
is negotiated between buyer and seller, also apply quality premiums and
discounts to the prices paid for fed cattle based on actual carcass
performance, but lack the vertical coordination aspect of AMAs and thus
do not provide price incentives for process-verified characteristics
such as organic or all natural that feeders need to know they will
receive prior to feeding.
---------------------------------------------------------------------------
\54\ Schroeder, T.C., B.K. Coffey, and G.T. Tonsor. ``Enhancing
Supply Chain Coordination through Marketing Agreements: Incentives,
Impacts, and Implications,'' in The U.S. Beef Supply Chain: Issues
and Challenges: Proceedings of a Workshop on Cattle Markets, ed. by
Fisher, B.L, J.L. Outlaw, and D.P. Anderson, Agricultural and Food
Policy Center Texas A&M University, June 3-4, 2021, p. 81.
\55\ See, for example, Ward, C.E., T.C. Schroeder, and D.M.
Feuz, ``Grid Pricing of Fed Cattle: Base Prices and Premiums-
Discounts,'' Oklahoma Cooperative Extension Service, AGEC-560,
available at: <a href="https://extension.okstate.edu/fact-sheets/print-publications/agec/grid-pricing-of-fed-cattle-base-prices-and-premiums-discounts-agec-560.pdf">https://extension.okstate.edu/fact-sheets/print-publications/agec/grid-pricing-of-fed-cattle-base-prices-and-premiums-discounts-agec-560.pdf</a>.
\56\ Some standard pricing incentives used in fed cattle
contracts are reported in the Cattle Contract Library Pilot Program.
For more information, please see USDA AMS LPGMN Cattle Contracts
Library--Explanatory Notes: <a href="https://www.ams.usda.gov/sites/default/files/media/CCL_ExplanatoryNotes.pdf">https://www.ams.usda.gov/sites/default/files/media/CCL_ExplanatoryNotes.pdf</a>.
\57\ See, for example, Doumit, K.M. and T.C Schroeder, ``Fed
Cattle and Beef Premiums and Discounts: Trends and Implications,''
Kansas State University Department of Agricultural Economics
Extension Publication, 8/28/2023. Available at: <a href="https://agmanager.info/livestock-meat/marketing-extension-bulletins/marketing-strategies-and-livestock-pricing/fed-cattle-0">https://agmanager.info/livestock-meat/marketing-extension-bulletins/marketing-strategies-and-livestock-pricing/fed-cattle-0</a> (last
accessed 10/1/2024).
---------------------------------------------------------------------------
The above line of argument remains contested, however. Indeed, most
lower quality cattle have historically been purchased through AMAs in
the southern feeding regions, while in the northern feeding regions a
larger proportion of cattle are higher quality and are much more likely
to be purchased using negotiated methods.\58\ Packer buyers are highly
skilled at predicting how live cattle will grade out after slaughter as
their job depends on it. They also are skilled at communicating to
sellers what they are looking for in a pen of cattle. Moreover,
negotiated grid transactions preserve the benefits of the grid while
also retaining the advantages of a negotiated base price, although they
lack the buyer commitment dimension of AMAs.
---------------------------------------------------------------------------
\58\ See, e.g., Thayer, A.W., Benavidez, J.R., and Anderson
D.P., ``Exploring the Impact of Fed Cattle Grade on Transaction
Type,'' ASFMRA 2024 Journal, available at <a href="https://higherlogicdownload.s3.amazonaws.com/ASFMRA/aeb240ec-5d8f-447f-80ff-3c90f13db621/UploadedImages/Journal/2024/Impact_of_Fed_Cattle_Grade.pdf">https://higherlogicdownload.s3.amazonaws.com/ASFMRA/aeb240ec-5d8f-447f-80ff-3c90f13db621/UploadedImages/Journal/2024/Impact_of_Fed_Cattle_Grade.pdf</a>; Taylor, C.R. (2022) Harvested
cattle, slaughtered markets? Available at: <a href="http://dx.doi.org/10.2139/ssrn.4094924">http://dx.doi.org/10.2139/ssrn.4094924</a>.
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Nevertheless, as the number of cattle that packers purchased with
AMAs became considerably larger than the spot negotiated market,
academic focus shifted to the issue of thin negotiated markets. Market
stakeholders also began to question whether spot market prices are
representative of the value of fed cattle on the market, and thus cast
doubt on the merits of using them as base prices in AMAs.\59\
Carstensen (2022) and others have argued that the full extent of how
buyer power influences the use of AMAs remains underappreciated in
mainstream agricultural economic analysis.\60\
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\59\ Fischer, B.L., and J.L. Outlaw. 2021. ``Introduction.'' The
U.S. Beef Supply Chain: Issues and Challenges. B.L. Fischer, J.L.
Outlaw, and D.P. Anderson, eds. College Station, TX: Agricultural
and Food Policy Center, Texas A&M University.
\60\ Carstensen, P.C., ``Dr. Pangloss as an Agricultural
Economist: The Analytic Failures of `The U.S. Beef Supply Chain:
Issues and Challenges,' '' (2022), available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4049230">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4049230</a>.
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Economic research into price discovery in thin markets has,
however, generally been skeptical of interventions that would set a
floor number or percentage of fed cattle to be traded in spot markets
each week. Koontz examined the role that different regions play in
leading price discovery, as well as the relative thinness and thickness
of the regional markets.\61\ He also estimated high costs to the
industry from proposed interventions that would impose a limit on AMA
usage in fed cattle markets.\62\ Peel et al. (2020) added that such
steps to mandate negotiated trade could have the unintended effect of
undermining the reliability of market price reporting by creating
incentives for misrepresenting transaction types.\63\ Adjemian et al.
also suggested a floor percentage would not be beneficial. They also
pointed out that thin markets tended to benefit large firms, so
programs to aid small producers might be a good focus for regulatory
agencies.\64\ Dennis and Lubben (2022) surface potential factors and
tradeoffs around the effectiveness of regional-based minimums.\65\
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\61\ Koontz, Stephen R. 2016, ``Price Discovery Research
Project--Objective Measures Findings Summary,'' Colorado State
University, 10, available at <a href="https://webdoc.agsci.colostate.edu/koontz/thinmarkets/Price%20Discovery%20Objective%20Measures%20Report%202016-06.pdf">https://webdoc.agsci.colostate.edu/koontz/thinmarkets/Price%20Discovery%20Objective%20Measures%20Report%202016-06.pdf</a>.
\62\ Koontz, Stephen R. 2021. ``Another Look at Alternative
Marketing Arrangement Use by the Cattle and Beef Industry.'' The
U.S. Beef Supply Chain: Issues and Challenges. B.L. Fischer, J.L.
Outlaw, and D.P. Anderson, eds. College Station, TX: Agricultural
and Food Policy Center, Texas A&M University.
\63\ Op Cit.
\64\ Adjemian, M.K., W. Brorsen, W. Hahn, T. Saitone, and R.
Sexton. 2016. ``Thinning Markets in U.S. Agriculture: What Are the
Implications for Producers and Processors?'' ERS EIB number 148.
\65\ Dennis, E.J. and Lubben, B.D., ``Regional Minimums in the
U.S. Beef Complex,'' (2022), available at <a href="https://cap.unl.edu/livestock/new-report-regional-minimums-us-beef-complex">https://cap.unl.edu/livestock/new-report-regional-minimums-us-beef-complex</a>.
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There is less available research on how benchmarks are used as base
prices in marketing agreements. Cattle markets are not the only markets
that employ benchmarked prices with manipulation concerns. Oil and
financial markets are two examples of markets that rely on benchmarks,
and both have seen large manipulation schemes.\66\ In a game theory
model, Hatfield and Lowery found that pegging prices in formula pricing
agreements to spot market prices can facilitate collusion among packers
and facilitate monopsonistic pricing. The authors suggest that these
advantages could explain why packers have shifted toward the use of
what they call spot-contracting (i.e., the use of variable spot-market
prices in formula pricing agreements).\67\ Earlier theoretical work by
Xia and Sexton and Davis found that use of ``top-of-the-market
pricing'' (TOMP) arrangements in particular bears similarities to
``most-favored'' nation (MFN) clauses and that their use exhibits
similar potential to facilitate coordination between competitors, as
well as dampen competition and prices.\68\ The structure of TOMP
purchasing arrangements reduces packer incentives to buy cattle in the
spot market. A more recent study by Garrido et al. also suggests more
generally that referencing reported prices in marketing agreements
distorts packer's incentives, reducing a packer's incentive to increase
bids to procure more cattle.\69\
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\66\ Gina-Gail S. Fletcher, ``Benchmark Regulation,'' 102 Iowa
Law Review 1929-1982 (2017), available at: <a href="https://scholarship.law.duke.edu/faculty_scholarship/4014">https://scholarship.law.duke.edu/faculty_scholarship/4014</a>
\67\ Hatfield, J.W. and R. Lowery. ``Facilitating Collusion with
Spot-Price Contracting,'' University of Texas--Austin: McCombs
School of Business, August 2, 2023. <a href="https://ssrn.com/abstract=4529677">https://ssrn.com/abstract=4529677</a> (accessed 7/5/2024).
\68\ See, Davis, D. ``Does Top of the Market Pricing Facilitate
Oligopsony Coordination?'' South Dakota State University Discussion
Paper, August 9, 2000; see also Xia, T. and R.J. Sexton. ``The
Competitive Implications of Top-of-the-Market and Related Contract-
Pricing Clauses,'' American Journal of Agricultural Economics 92(4):
1181-1194, April 2010.
\69\ Garrido, F., M. Kim, N.H. Miller, and M.C. Weinberg.
``Buyer Power in the Beef Packing Industry,'' January 2024, <a href="https://www.nathanhmiller.org/cattlemarkets.pdf">https://www.nathanhmiller.org/cattlemarkets.pdf</a> (accessed 9/25/2024);
Garrido, F. G and M. Kim, N.H. Miller, and M.C. Weinberg. ``Buyer
Power in the Beef Packing Industry: An Update on Research in
Progress,'' Report prepared for Washington Center for Equitable
Growth, March 30, 2022.
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Policy discussions following from this research have tended to
frame the problem as a zero-sum debate between the use of formula
contracts and cash negotiated transactions.\70\ Legislative proposals
for mandatory minimum cash trading and voluntary industry proposals to
address concerns around price discovery commonly focus on the numerical
volume of spot, negotiated grid, or otherwise qualified trading.\71\
However, it may be that it's not an either/or question, but rather how
formula contracts are developed, and
[[Page 82531]]
thus in turn how they affect the cash negotiated market. The question,
then, is whether the incentive structure can be appropriately shifted
such that formula pricing arrangements facilitate rather than restrict
price discovery and fair competition.
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\70\ See, e.g. TAMU, <a href="https://afpc.tamu.edu/research/publications/710/cattle.pdf">https://afpc.tamu.edu/research/publications/710/cattle.pdf</a>.
\71\ See, e.g., S. 4030 (117th Cong., 2021-2021); Letter from
Marty Smith, President, National Cattlemen's Beef Association, to
Fellow Cattle Producers, Oct. 15, 2020, available at <a href="https://cdn.farmjournal.com/s3fs-public/inline-files/Letter%20from%20Marty%20to%20NCBA%20Membership%20-%20FINAL.pdf">https://cdn.farmjournal.com/s3fs-public/inline-files/Letter%20from%20Marty%20to%20NCBA%20Membership%20-%20FINAL.pdf</a>.
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In financial and commodity trading markets, increasing attention
has been paid in recent years to the regulation of benchmarks to ensure
reliability and prevent manipulation of the benchmark or other forms of
unfair or deceptive trading in relation to the benchmark.\72\ The
extraordinary manipulation of the London Interbank Offer Rate (LIBOR),
which was the reference price for interest rates cases from 2015 and
affected trillions of dollars of financial instruments, drove
widespread interest in regulating benchmarks.\73\ Among the reforms
adopted by various regulators include changing which benchmarks are
available for use in contracts.\74\ Another tool deployed by financial
regulators has been enhanced transparency in the underlying benchmark
market, which in turn has enhanced the opportunity for standardization
and improved price discovery in certain previously-thought bespoke and
difficult to regulate markets. The most notable of these is the bond
market, where the Financial Industry Regulatory Association (FINRA)'s
Trade Reporting and Compliance Engine (TRACE) system immediately
reports a handful of key characteristics for bond transactions, which
allows investors and market participants to normalize pricing across
diverse bond trading and, in effect, compare apples to oranges. In
doing so, it dramatically reduced the fees that dealer banks could
charge through opaque pricing, and improved trading efficiency and
fairness for investors.\75\ FINRA also confidentially reports
scorecards to broker-dealers providing them information about their
performance relative to peers, which has reduced markups that investors
pay. Regulators have also long paid attention to trading incentives,
pricing differences, and fairness concerns that may arise from the
transparency differences between ``lit'' (reported) and ``dark''
(unreported) markets.\76\
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\72\ Gina-Gail S. Fletcher, ``Benchmark Regulation,'' 102 Iowa
Law Review 1929-1982 (2017), available at: <a href="https://scholarship.law.duke.edu/faculty_scholarship/4014">https://scholarship.law.duke.edu/faculty_scholarship/4014</a>; Andrew Verstein,
Benchmark Manipulation, 56 Boston College Law Review 215 (2015),
available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482021">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482021</a>.
\73\ See, e.g., Deutsche Bank's London Subsidiary Agrees to
Plead Guilty in Connection with Long-Running Manipulation of
LIBOR,'' available at <a href="http://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation">http://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation</a>.
\74\ See, generally, Federal Reserve Board and Federal Reserve
Bank of New York, ``Transition from LIBOR,'' available at <a href="https://www.newyorkfed.org/arrc/sofr-transition">https://www.newyorkfed.org/arrc/sofr-transition</a>; Alternative Reference Rates
Committee, ``ARRC Closing Report: Final Reflections on the
Transition from LIBOR,'' Nov. 2023, available at <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-Closing-Report.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-Closing-Report.pdf</a>.
\75\ Kumar Venkataraman, ``Market Transparency, Liquidity
Externalities, and Institutional Trading Costs in Corporate Bonds,''
available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=827984">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=827984</a>. Also on FINRA's TRACE: <a href="https://www.finra.org/filing-reporting/trace/trace-independent-academic-studies">https://www.finra.org/filing-reporting/trace/trace-independent-academic-studies</a>.
\76\ See, e.g., Chair Gary Gensler, U.S. Securities and Exchange
Commission, ``Market Structure and the Retail Investor:'' Remarks
Before the Piper Sandler Global Exchange Conference,'' June 8, 2022,
available at <a href="https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-piper-sandler-global-exchange-conference-060822">https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-piper-sandler-global-exchange-conference-060822</a>;
Commissioner Kara M. Stein, U.S. Securities and Exchange Commission,
``Market Structure in the 21st Century: Bringing Light to the
Dark,'' Sept. 30, 2015, available at <a href="https://www.sec.gov/newsroom/speeches-statements/stein-market-structure">https://www.sec.gov/newsroom/speeches-statements/stein-market-structure</a>; Commissioner Michael S.
Piwowar, U.S. Securities and Exchange Commission, ``The Benefit of
Hindsight and the Promise of Foresight: A Proposal for A
Comprehensive Review of Equity Market Structure,'' Dec. 9, 2013,
available at <a href="https://www.sec.gov/newsroom/speeches-statements/2013-spch12013msp">https://www.sec.gov/newsroom/speeches-statements/2013-spch12013msp</a>.
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Other industries have developed solutions to address complex
pricing challenges, some of which may have the potential to inform
development of new market price information and reporting products that
would provide additional options and could be adopted as alternative
benchmarks in the cattle industry. Levin and Milgrom (2010) discuss
several ways in which concepts of ``standardization'' and
``conflation'' have been applied in the context of pricing a variety of
diverse goods that include wheat, diamonds, radio spectrum, and
internet advertising.\77\
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\77\ Jonathan Levin and Paul Milgrom, ``Online Advertising:
Heterogeneity and Conflation in Market Design,'' American Economic
Review vol. 100(2), May 2010, p. 603, available at https://
web.stanford.edu/~jdlevin/Papers/OnlineAds.pdf last accessed 7/18/
2024.
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In light of identified concerns about existing cattle industry
benchmarks, application of ideas from other industries could prove
useful. USDA, through a range of programs, regularly provides a wide
array of useful market information and could continue to explore
possibilities for developing additional price reports that provide
valuable price discovery information to the industry. Expanded price
discovery information from newly developed reports could create
additional options that market participants could potentially use as
benchmarks that improve price discovery and make the market more
transparent. Other possibilities might include the production of
reports that could function more similarly to the TRACE system, which
immediately reports a handful of specific identified characteristics
for every transaction on a national, anonymous basis.
This ANPR focuses on which benchmarks are appropriate for use as
base prices in formula agreements, along with related trading practices
and implications arising from the use of those benchmarks. As discussed
below, the purpose of this ANPR is to solicit useful information that
can be used to inform future rulemaking that could either change base
price choices or otherwise regulate packer trading connected with the
use of base prices.
III. Potential Options To Remove Barriers to Price Discovery and
Improve the Fair Trading in Relation to Cattle Price Benchmarks
AMS seeks to identify regulatory changes for ``covered packers''
with respect to base price formation in formula contracts and related
trading practices, transparency in price reporting, and information
collection/market monitoring that could ameliorate these problems with
minimal adverse consequences for industry stakeholders. ``Covered
packer,'' means every packer slaughtering fed steers and heifers as
defined in 7 U.S.C. 191(a) that has slaughtered five percent or more of
the total fed cattle that were slaughtered nationally in the past five
years. There are no covered packers that would be defined as small
businesses by the Small Business Administration because all covered
packers to which the ANPR applies have more than 1,150 employees.
Through this ANPR, AMS seeks feedback on whether the following proposed
interventions could mitigate the adverse consequences of AMAs without
losing their benefits to covered packers.
A. General Regulatory Options
AMS is first requesting comment on several broader-based regulatory
options that would each regulate covered packers' purchases of fed
cattle from fed cattle producers. The general regulatory options can be
considered individually or in combination with each other. The options
may also have associated written documentation requirements (which are
discussed in section III.D.). Commenters are invited to comment on
whether one or more of the options would help remove barriers to price
discovery or market transparency, improve the fair-trading environment
in relation to cattle price benchmarks, or otherwise address concerns
that producers and market participants may
[[Page 82532]]
have with respect to fairness, preferences, competition, or other
aspects of the markets, as well as the costs and benefits, obstacles,
or other aspects of these options.
1. Fair Trading in Relation to a Benchmark. AMS is considering two
options (options 1.a. and 1.b.) to address potentially problematic
trading practices in relation to the use of a reported cattle benchmark
in a base price formula (i.e., when the covered packer uses a reported
price as a base price in an AMA). The first option (1.a.) would provide
broader, more flexible coverage, and enforcement would heavily depend
upon AMS's ability to identify challenges based on the potential
documentation requirements set forth in section III.D. below. In the
second option (1.b.) described below, AMS would identify more specific
practices of concern, thus providing less flexibility but also
potentially enhancing enforceability.
Option 1.a. In the first option, AMS would require covered packers
that utilize a benchmark in their base price to design and operate
their cattle buying operations in such a way that ensures a fair-
trading environment in spot cattle markets affected by the benchmark
price used in formula pricing agreements. In determining whether
regulated entities are in compliance, the Secretary would consider:
i. The extent to which the markets on which a formula pricing
agreement is based are robustly competitive.
ii. The reliability of base prices in formula pricing agreements to
reflect the competitive market value of fed cattle, their sensitivity
to other factors, and the risks of manipulation.
iii. The extent to which the packer has identified and mitigated
any risks stemming from the use of the base price in a formula pricing
agreement to fair trading practices in relevant fed cattle markets.
Option 1.b. In the second option, AMS would prohibit covered
packers from manipulating cattle benchmark prices through one of the
following specifically defined means. AMS notes that enforcement of
these options present significant evidentiary challenges, but includes
them for the purposes of eliciting public comment around their value,
workability, and alternatives:
i. Targeting its bidding in the cash market toward lower-value
specifications of cattle and avoiding higher-value specifications of
cattle, as a practice and pattern without a reasonable business
justification. Such a practice may be used to distort base prices used
in formula pricing agreements as most purchases in the cash market
would, likely, be for lower-value specifications of cattle within the
given market, leading to lower benchmark prices in AMAs than would be
the case in a fully competitive market. Targeting would be identified
through enhanced monitoring of markets, complaints, and investigations.
ii. Structuring a transaction with the purpose of it being included
or excluded from a benchmark price in an AMA, thus preventing that
transaction's price from influencing the ordinary supply and demand in
the benchmark market.
iii. Holding out or failing to purchase cattle in specific
reporting areas for the purpose of reducing or otherwise changing a
reported benchmark price.\78\
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\78\ A small number of packers account for most fed cattle
negotiated cash transactions, and spot market prices have a
significant impact on formula pricing agreements. Given these facts,
strategic behavior by covered packers has the potential to impact
fed cattle prices for both negotiated cash transactions and AMA
transactions.
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iv. Using top-of-the-market pricing (TOMP) formulas in which a
formula contract base price in a formula pricing agreement is based on
the top price reported in the negotiated cash market.\79\
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\79\ TOMP links the price paid under the formula contract
directly to the highest price paid on a one-to-one basis, which has
been shown to create adverse market incentives and put downward
pressure on market prices. See Xia and Sexton, op. cit.
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v. Manipulating internal records in any way that affects a price,
standard, or threshold referenced in a pricing agreement for cattle or
beef.
2. Exclusivity. AMS is considering a provision that would
discourage a covered packer from requiring exclusivity of a producer in
an AMA when it utilizes a spot price cattle benchmark. Whether crafted
as a prohibition, a presumption, or through an incentive structure, the
packer could not threaten to withdraw an AMA or otherwise prevent a
producer in an AMA from selling or seeking to sell a substantial amount
of cattle to another packer outside of the AMA, such as through
utilizing competitive price discovery tools like cattle exchanges or
auctions. The purpose would be to limit both express or implied
contractual requirements for exclusivity, as well as informal
exclusivity such as threatening or refusing to buy cattle or offering a
lower price. The approach could include a requirement for contractual
disclosure of the minimum number of cattle that the AMA-holding
producer can, of right, market or sell to another packer in the
benchmark market. A presumption of compliance could also encourage
certain practices; for example, 20 percent for general cash negotiated
trade or 15 percent if a competitive price discovery tool such as a
cattle exchange or auction were selected. The producer would not be
required to exercise the option, or could opt to take a hybrid
approach, for example, by utilizing exchange trading to set a base
price but maintaining access to a producer's specialized AMA grid with
a packer through exchange trading options available today. AMS notes
that producer participation in exchange trading could depend upon
support for the exchange's costs, such as through a market-making fee.
AMS is also considering other tools to reduce exclusivity as a
barrier to competition between packers bidding on cattle. P&S Act non-
discrimination principles may suggest that any producer be offered an
AMA or pricing available under an AMA when the producer is able to meet
the AMA's terms and conditions, absent a legitimate business
justification. Such an approach could potentially be paired with a
compliance presumption where the packer engaged in competitive and open
exchange trading for a certain portion of their AMA cattle.
3. Relative Variation Among Cash and Formula Purchases. AMS is
considering prohibiting covered packers from engaging in a pattern of
cattle trading in the negotiated benchmark market such that the
percentage variation in week-to-week purchases in the benchmark cash
market is substantially greater rate than the percentage variation in
quantity purchased week-to-week under the formula pricing agreement,
absent legitimate business justification--for example, if the packer
certified the lack of availability in the benchmark market of the
cattle at a given quality level or specification. Such an approach
should make AMA contracts bear more of the risk of quantity volatility
when relying on the cash market for price discovery purposes. This
prohibition could be paired with a presumptively permissible minimum
use of a cattle exchange or auction.
4. Packer Pick-up and Captive Supply. AMS is considering a
provision requiring covered packers to fully compensate sellers for all
maintenance costs of the cattle if they fail to pick up cattle
purchased in a negotiated transaction during the time period negotiated
with the seller or within seven days if not specified in negotiations.
[[Page 82533]]
B. Specific Base Price Regulatory Options
AMS is concerned that competitive market conditions within USDA
reporting regions may cause certain regional negotiated cash fed cattle
prices to be unreliable benchmarks for formula contracts, and that the
design of certain AMS reports are not appropriate for use as benchmarks
in formula pricing arrangements. As noted above in section II., some
regional cash markets are thinly traded with high levels of local
packer concentration. Additionally, the use of benchmarks that do not
have quality specifications may leave those markets vulnerable to
gaming or create obstacles for producers seeking to sell higher quality
cattle. To the extent that the use of different benchmarks in formulas
(such as the use of quality-specific reports) and different approaches
to trading (such as exchanges) can ``thicken'' the market (i.e., make
it more competitive and comparable across different cattle types), the
robustness of price discovery would be enhanced.
AMS is requesting comment on several options for regulating the use
of regionally reported prices as base prices in formula pricing
agreements. Regional prices could only account for more than 50 percent
of the value of any formula if one of four conditions is met (options
1, 2, 3, or 4 below). The purpose of the provision would be to utilize
benchmark options that offer incrementally greater market thickness and
resiliency to external shocks which could otherwise undermine the
reliability of using the existing regional average negotiated cash
prices as a benchmark.
One way that regional price information could be incorporated as
the predominant value in formulas would be if new price series or
indices could be developed which were deemed suitable for that purpose.
USDA seeks comment on the feasibility and value to the industry of
developing and publishing additional market price information made
available by publishing new reports under its existing authority. To
the extent that industry stakeholders would find this information
useful, and that it would mitigate fairness concerns, new price
reporting could provide additional options for industry benchmarks.
The specific base price interventions listed below can be
considered individually or in combination with each other. The
interventions may also have associated written documentation
requirements (which are discussed in section III.D. below). Commenters
are invited to comment on the costs and benefits, obstacles, or other
aspects of these options. Note that section III.C. below provides a
list of benchmarks that may mitigate fairness concerns. Comment is also
requested on the list of benchmarks. The following approaches could be
utilized to offer incremental improvements to regional price
benchmarking:
1. The regional benchmark could reflect all cattle sold on a
negotiated cash basis in the relevant market as standardized to a
single quality specification. The standardized benchmark would
represent a ``par lot.'' For example, a benchmark could report all fed
cattle sales transactions in a given regional market adjusted to a par
lot defined as live weight basis, steers, 70 percent choice, Yield
Grade 3. Individual sales would continue to transact at whatever value
the parties agree given the attributes (quality, yield, other premiums/
discounts, etc.) of the particular cattle transacted. Only the
benchmark would mathematically translate those actual prices into
prices as if the transactions were the par lot, for the purposes of
thickening the market for the standard par lot. Again, cattle trade at
their own negotiated price. Only the reporting adjusts it so that there
is more robust price discovery on an apples-to-apples basis.
This mathematical adjustment could via be a third-party developed
reference price, a USDA-developed reference price, or it could be based
on publicly available information that the packer utilizes to construct
its base price formula. The development of the standardized regional
benchmark price may require USDA to collect information from packers
that it does not currently collect, and this may require changes to
USDA information collection forms or separate rulemaking. AMS
acknowledges concerns may still exist regarding price discovery and
manipulation risks and invites comment on whether there is a minimum
level of trade that should serve as a floor in the market before the
region could be used as a benchmark even under this approach.
2. The regional benchmark could be a comprehensive fed cattle
reported price, which if reported would include negotiated spot
transactions comprised of reported negotiated cash live, negotiated
cash dressed, and negotiated grid net transactions. This is not
currently reported on a regional basis, but AMS Market News is
currently looking into whether it has sufficient information to begin
reporting regional comprehensive reports in the near future. AMS
recognizes that this approach offers less benefits to price discovery
than option 1. above but seeks comment on it given the greater
feasibility of operationalizing it.
3. The benchmark could be the five-area regional average reported
by AMS Market News at a particular quality grade specification, such as
within five or ten percentage point range for Choice grade. AMS
recognizes that this approach offers less benefits to price discovery
than option 1. above and that packers may retain an ability to place
downward pressure on the cash market given that the five-area regional
average reflects a composite of local market trading practices.
However, AMS seeks comment on this option given the greater feasibility
of operationalizing it over other options.
4. Regional cattle prices from a cattle exchange or auction would
be standardized to a particular quality grade specification and meet
sufficient standards of oversight and competitive trading.
C. Presumptively Permissible Base Price Options
Under any of the specific regulatory options described in section
III.B. above, a range of benchmarks would still be presumptively
permissible to determine the predominant value of the base price in a
formula price agreement. A first set of possible alternative benchmarks
could consist of existing market price reports or indices that may be
less vulnerable to manipulation or strategic trading choices that have
unintended adverse consequences on other producers due in part to the
``thickness'' of the markets and/or the specificity of the market.
These alternative benchmarks include super-regional USDA-reported
negotiated cash prices (i.e., the 5-Area Average or National Report)
that are ``thicker'' market indices because they aggregate reported
transactions from multiple regions.
Possible benchmark alternatives could also include several proxies
for negotiated cash prices. Live cattle futures contracts are
derivatives for which fed cattle are the underlying asset, and economic
research has consistently shown a connection and flow of information
between fed cattle prices and live cattle futures. Moreover, the live
cattle futures contract contains specifications relating to the cattle
which ground the value of trading in the contract. AMS acknowledges
concerns from some producers relating to the potential influence of
packers in the futures market. AMS invites comment on whether there are
ways to mitigate those concerns, such as with a condition relating to
stricter position limits. AMS
[[Page 82534]]
also acknowledges that futures contracts are likely to converge with
cash prices as delivery approaches, and accordingly, they could suffer
from the same substantive manipulation and/or pay suppression as
formulary contracts. AMS invites comment on potential solutions to
mitigate these concerns.
Other possible benchmarks include indices based on fed cattle input
costs (e.g., corn or other inputs) or on downstream output prices for
boxed beef. Commenters are invited to comment on the costs and
benefits, unintended consequences, risks of manipulation, or other
aspects of these options. USDA also seeks comment on how additional
existing publicly available market information may also be useful for
developing reliable and robust alternative fed cattle contracting
benchmarks.
A covered packer could be permitted to use any of the following
indices to comprise 50% or more of the base price in a pricing
agreement:
1. Regional benchmarks reflecting all cattle purchases on a
negotiated basis standardized to a single benchmark quality.
2. AMS Regional Comprehensive fed cattle reported price.
3. 5-Area Average Reported Cattle Prices at a particular quality
grade specification (such as within 5 or 10 percentage point range for
Choice grade).
4. Boxed Beef Prices.
5. Live Cattle Prices (including live cattle futures prices imputed
to different quality specifications).
6. Corn or Other Input Prices.
7. Cattle prices from cattle exchange or auction that meet
sufficient standards of oversight and competitive trading.
D. Written Documentation Options
AMS is requesting comment on several potential written
documentation requirements for covered packers to allow AMS to
determine compliance with the above ANPR options. Commenters can
consider the options individually or in combination with each other.
Commenters are invited to comment on the costs and benefits, obstacles,
or other aspects of these options.
1. Packer Market Fairness, Price Discovery, and Access Plan.
Covered packers could be required to develop, maintain, and execute a
written plan describing their approach to fed cattle price discovery
and market access for all sellers, particularly small and mid-sized
feeders and producers, in any market which serves as a benchmark in a
pricing agreement of the packer or in any market which materially
influences or is materially affected by price discovery in the
benchmark market (the Covered Markets). The plans for each calendar
year would be provided confidentially to AMS-PSD on an annual basis by
the end of January of that year (e.g., a 2025 plan must be submitted by
January 31, 2025). Under this option, plans would have to include
written processes for:
a. Price Discovery. How the covered packer structures market
participation and procurement methods in a manner that contributes to
price discovery in the Covered Markets. In particular, the plan should
describe how the packer strives to facilitate and encourage price
discovery in markets where benchmark prices are determined for fed
cattle pricing agreements by the packer. The packer's plan for
contributing to price discovery might also include voluntarily
reporting of additional market pricing information (beyond existing
mandatory price reporting requirements) that contributes to price
discovery. Such participation could include, but is not limited to,
cash negotiated trade, negotiated grid trade, exchange and auction
trade, and market-making contributions to a relevant institution such
as a cattle exchange in lieu of price discovery. The covered packer
would have to explain its analysis relating to Covered Markets.
b. Market Access. Describe purchasing strategies and actions to be
taken by the covered packer for the purpose of ensuring reasonable
market access for sellers. This could include plans for purchasing fed
cattle from small feeders, engaging in price discovery mechanisms such
as exchange trading, or paying market making contributions to support
exchange trading by others. Such strategies and actions should be
reasonably designed to mitigate excessive risk of non-placement of
cattle or sales below full value by market participants in the
benchmark markets used in pricing agreements (i.e., who are taking/
absorbing the risk/cost of price discovery).
c. Base Prices. For each fed cattle pricing agreement involving a
reported market price or any other reference to a value that is
expected to change during the term of the agreement, report the pricing
agreement describing how the packer will determine final payment for
cattle. The report should clearly identify all prices and values in
sufficient detail to reproduce the amount paid.
d. Market Participation.
i. Describe purchasing strategies and actions to be taken by the
covered packer for the purpose of ensuring reasonably consistent and
non-manipulative participation in benchmark markets used in the
packer's pricing agreements with respect to quantity and quality
purchased of fed cattle.
ii. Provide a target and range for relative coefficients of
variation (CV) on weekly quantities of fed cattle procured using spot
and formula methods in the benchmark markets of pricing agreements as a
measure of risk transfer (specifics of calculations to follow). If
those targets were not hit, explain the business justification for why
not. AMS also invites comment on the relative value of the CV, and
whether other metrics would be more appropriate to identify changes or
differences in market access risk.
e. Fed Cattle Supply and Demand Disruptions. Explain how the
covered packer will maintain adequate price discovery and market
participation in benchmark markets used in pricing agreements during
periods of significant market disruptions in the supply and/or demand
for fed cattle (would include human pandemics, drought, animal disease
outbreaks, emergent animal health issues, lengthy plant shutdowns,
labor strikes, other beef packing and supply disruptions, events that
trigger force majeure in contracts, etc.).
f. Pickup Practices.
i. Covered packers would need to describe all policies and
procedures for circumstances in which pickup or delivery of negotiated
cattle extends beyond seven days or the scheduled (negotiated) number
of days after the cattle are traded.
ii. The policies and procedures would need to include when
ownership of the cattle will be transferred to the packer and how the
packer determines timing, amount, and payment for assuming all expenses
of the cattle, including feed, yardage, and death loss.
iii. Policies and procedures would need to describe how the packer
will fully compensate fed cattle sellers when pickup exceeds seven days
or the time period (number of days) that was negotiated. This should
include separate policies and procedures for cattle that are sold on a
live weight basis or on a carcass weight basis.
2. Packer Compliance Report. Covered packers would be required to
confidentially report on an annual basis to AMS:
a. The actions the covered packer undertook to fulfill each
component of their Packer Market Fairness, Price Discovery, and Access
Plan. The report would be due to AMS by the end of January for the
previous year (e.g., a report on compliance for 2025 must be submitted
by January 31, 2026). The compliance report would be required
[[Page 82535]]
beginning with the calendar year after the rule implementing the
requirement for the plan becomes effective.
b. Each purchase transaction for which cattle were not picked up
within seven calendar days or the scheduled (negotiated) number of days
and the reason for delayed pickup, measures taken to shorten the pickup
time, and how the packer compensated the seller for the delay in
pickup.
3. Internal Review. The covered packer's CEO would need to review
and certify approval of each annual plan and compliance report.
IV. Request for Public Comments
AMS seeks comment on the proposals discussed in this ANPR.
Commenters are invited to comment on whether any or all of the
proposals would address concerns about the fair functioning of the
cattle markets, as well as the costs and benefits, obstacles, and other
options commenters want AMS to consider. Commenters may consider each
section individually or may consider the ideas together. In addition to
inviting general comments, AMS has prepared a list of specific
questions. Commenters may answer all, some, or none of these questions
as they see fit.
A. General Regulatory Options
1. In what ways does the use of regional price reports as
benchmarks in formula contracts influence those regional markets,
including the manner or extent of buyer (packer) participation or
cattle procurement in the negotiated or spot markets within those same
reporting regions?
2. Does the use of regional negotiated price reports as formula
contract benchmarks adversely affect buyer demand in negotiated
markets? If yes, how? Are these adverse effects stronger for cattle of
any particular grade, class, type, etc., or in any specific regions?
What could be preferred alternative prices to use as formula contract
benchmarks? How should AMS determine whether prices used as benchmarks
are competitive or reliable?
3. To what extent would the general regulatory options described in
section III.A. above--addressing practices related to fair trading in
relation to a benchmark, exclusivity, relative variation among cash and
formula purchases, and packer pickup--be useful for clarifying the most
problematic purchasing activities that are known or believed to
adversely affect fed cattle markets and sellers?
4. Are there other problematic purchasing activities or conduct
that are known or believed to adversely affect fed cattle markets and
sellers that are not addressed by the regulatory options described
above? If so, what regulatory options are needed to address such
issues?
5. Please provide feedback regarding the prevalence of practices
addressed in this ANPR or any other related practices as observed by
market participants. What actions, specifically, would be most
appropriate and effective for AMS to address concerns about potential
manipulation or distortion of market prices?
6. Please comment on the effect of market power and industry
concentration on producers in regional fed cattle markets. What, if
any, relationship does increasing packer concentration have on the use
of particular fed cattle pricing methods and prices paid to packers?
How has concentration affected the resilience of the regional markets
and their ability to respond to market shocks?
7. The DOJ Consent Decree expired in 1981. Were there specific
protections or prohibitions in the Consent Decree that would have
particular value in today's market? If so, which ones?
8. Top of the Market Pricing (TOMP) refers to pricing agreements
that set a formula contract base price based on the top price reported
in the negotiated cash market. Please comment about any effects of TOMP
on sellers or buyer behavior. Should TOMP be prohibited as a method of
base price determination?
9. Formula agreement AMAs may include a wide variety of written,
verbal, or implied agreements or expectations between fed cattle buyers
and sellers which can differ in the degree to which they limit the
seller's (feeders or producers) marketing options. Please provide
comment about the extent to which these AMAs constrain marketing
options for sellers. Do these AMAs commonly require sellers to deliver
all cattle they produce to a single packer (exclusivity)? Are sellers
under these AMAs prevented from using other selling methods for some
cattle, including cattle exchanges, auctions, or negotiations with
other packers?
10. When cattle are purchased through negotiated transactions,
there is often some agreement between the parties regarding the time
period (number of days) within which the buyer will pick up the cattle
and/or compensate the seller for maintenance costs. AMS seeks comment
and information about the frequency with which buyers fail to pick up
cattle within an agreed-upon time frame. In such cases, are buyers
adequately compensated? What is the extent of the problem, and should
AMS consider additional regulation to address it? What would be an
appropriate requirement for prompt buyer pickup and seller
reimbursement?
11. Do large changes in the numbers of fed cattle that packers
purchase each week in the negotiated spot market create undue risk for
sellers in those markets? If yes, what percentage change from the
previous week do you consider large? Does widespread procurement of
cattle through formula pricing agreements cause negotiated markets to
be more volatile?
12. What would be an appropriate minimum level of use of a cattle
exchange or auction by a packer buyer to qualify for a safe harbor
provision in a prohibition against relative variation in quantity
purchased week-to-week in the benchmark market changing at a
substantially greater rate than the relative variation in quantity
purchased week-to-week under the pricing agreement?
13. What motivates sellers to market cattle in the negotiated (cash
or spot) market rather than through a formula pricing agreement or
other type of AMA?
14. To what extent are formula pricing agreements or other AMAs
available to small and medium-sized feedlot sellers and what are their
reasons for choosing whether or not to use them? What rules could AMS
develop to ensure non-discriminatory access?
15. How do those producer motivations differ by relative size and
region, and to what extent to prices in one region follow (or otherwise
affect) trading the occurs in another region?
16. How, specifically, do sellers and buyers determine the method
by which base prices are determined for formula pricing agreements? To
what extent does the buyer and the seller influence the choice of base
price? What base price sources (e.g., USDA regional price reports, live
cattle futures, etc.) do sellers and buyers prefer? What specific
factors and considerations are important to sellers and buyers when
choosing a base price?
17. Please describe views that AMS should consider relating to
compliance burdens with any of the options presented, generally above
or specifically below. Is the definition of ``covered packer'', which
limits certain interventions to larger packers, an appropriate approach
to limiting compliance burdens on the industry?
18. To what extent, if at all, would these general regulatory
options address other pervasive avenues for manipulation of cattle
prices and how
[[Page 82536]]
should USDA address any alternative forms of manipulation?
19. Is it necessary and effective for AMS to restrict the
proportional use of formula pricing agreements relative to cash
trading? If so, under what conditions, and what proportion is necessary
and effective and why? Should the level of market concentration be
considered in this determination, and why?
20. Does the timing of price setting (after contract formation but
on a future price) increases the risk of manipulation of cash markets
or other harms?
21. Do specific types of AMAs create more problems than others and
should AMS limit the use of some types of contractual provisions in
AMAs?
B. Specific Base Price Regulatory Options
1. Please comment about the use of USDA regional price reports (for
example, weekly negotiated live or dressed cash steer price for a
particular region) as benchmarks (also called base prices or reference
prices) in fed cattle formulas. To what extent do available prices
accurately reflect competitive market conditions in time periods (i.e.,
each week) and in regions? Do buyers or sellers have any concerns or
evidence that low weekly trading volumes (i.e., few cattle and/or
transactions) or small numbers of market participants distort
benchmarks based on regional price reports that are used as base prices
in formula contracts? If yes, what weekly trading volumes (number of
transactions or number of cattle) and/or number of market participants
do you consider low?
2. Please comment on the value of using USDA prices based on
specific reporting regions rather than more aggregated reports (i.e.,
5-Area Average or National Report) as the basis for formula contract
benchmarks. Is a prohibition on using more than 50% of a regional price
for a base price in a formula agreement appropriate? If not, is there
level of partial use that would be appropriate?
3. What problems would buyers and/or sellers encounter if regional
prices were no longer available for use as benchmarks to establish base
prices in formula contracts? Would no longer using regional benchmarks
mitigate some of the market power dynamics between increasingly
consolidated packers and producers?
4. Should a contract benchmark be based on a reported price for
cattle with specific characteristics (e.g., steers 65-80% choice or 55%
prime) or for more general categories (e.g., total of all classes and
all grades)?
5. AMS has historically published a National Weekly Fed Cattle
Comprehensive report that reports composite net prices paid for cattle
purchased using all purchasing methods. Recently, AMS expanded this to
include a new Regional Weekly Comprehensive Purchase Type report that
provides a composite price for all beef type cattle purchased
(including live and dressed basis, FOB and delivered, steers, heifers,
and mixed, etc.) for negotiated methods only (negotiated cash and
negotiated grid net) and for combined negotiated and formula methods.
Please comment on the value of this additional regional market
information. Could these Comprehensive regional price series provide a
useful alternative formula contract benchmark if currently used
regional negotiated cash prices were no longer available?
6. Could alternative compensation structures restore competition
and negotiation in cattle payment structures while maintaining the
benefits of AMAs? For example, could negotiated grid sales, where the
value of the cattle is assessed after slaughter and feeder compensated
based on the actual quality of cattle sold, adequately take into
account certification and grading?
7. To what extent does benchmarking with respect to live cattle
futures solve the problem of suppressed benchmark inputs? How can such
a futures benchmark be regulated to prevent manipulation? For example,
should a future rulemaking forbid purchasing cattle after the close of
mandatory reporting or the exchange day on Friday afternoon, to end the
practice of paying certain feedlots a higher price without contribution
to the week's average price or to futures prices to which formula and
forward contracts are tied?
8. To what extent does pegging benchmarks to inputs (e.g., feed) or
outputs (e.g., wholesale boxed beef) mitigate fairness concerns related
to packer spread and manipulation of benchmarks?
9. What would be the challenge of requiring that all formula
contracts contain a firm negotiated base price that can be equated to a
specific dollar amount when the contract is entered into? How could
such a contract implement quality adjustments or otherwise contain the
efficiency benefits of AMAs without reliance on spot benchmark?
10. Please comment on how information disclosures might address the
concerns identified herein.
11. To what extent could nondiscrimination principles be applied to
mitigate exclusivity that obstructed price discovery, competition, and
market access?
12. Should AMS incentivize exchange trading as a mechanism to
enhance price discovery? If so, how should this be done?
13. Formula cattle selling arrangements enable packers to
effectively secure a ``captive supply'' of cattle by establishing
future commitments for future delivery and thereby reduce the need to
purchase cattle on the cash market. Please comment on whether and how
such arrangements might harm competition or distort fed cattle markets.
14. To what extent would the policy options outlined in this ANPR
solve problems related to market power and lack of sufficient price
discovery? If there are still gaps, what additional reforms would be
necessary to ensure a fair-trading environment for all cattle
producers?
C. Presumptively Permissible Base Price Options
1. Is the potential prohibition of regional negotiated cash price
benchmarks based on the predominant use (largest component of value,
presumptively 50 percent) appropriate? If not, what approach would be
most effective and why? Are there additional conditions that would help
ensure regionally negotiated cash price benchmarks are sufficiently
thick, based on competitive conditions, and not prone to packer
manipulation?
2. What criteria, specifically, would be appropriate for AMS to
consider when evaluating whether a fed cattle benchmark would serve the
needs of industry stakeholders and could function effectively as a
means of establishing base prices for formula contracts?
3. What criteria should be applied when evaluating whether reported
prices from, for example, a cattle exchange, auction, or negotiated
market could appropriately be used as formula contract benchmarks
(i.e., to set base prices)? Should it be based on market thickness with
consideration for numbers of cattle or transactions? What other factors
should be considered?
4. AMS is seeking comment from industry stakeholders about the
desirability and feasibility of undertaking proactive efforts to
develop new price information and market reporting which, if useful to
the industry, could provide additional options for adoption as fed
cattle benchmark alternatives. These efforts would seek to develop
robust benchmark alternatives that are designed with the realities and
[[Page 82537]]
challenges of thinning markets in mind, especially at the regional
level. Development could use certain advanced modeling techniques for
aggregating and reporting market information. Such models may have the
potential to incorporate valuable information related to premiums and
discounts paid for fed cattle characteristics. Or, tailored alternative
benchmark reports could be designed to enable market participants to
develop their own models based on certain consistent widely reported
transaction-specific information, as is the case under the FINRA's
TRACE System for bonds.
5. What risks might exist during any transition away from the use
of existing benchmarks, and in what ways could they be mitigated? Are
certain external regulatory regimes valuable for USDA to learn from in
this regard, such as how financial regulators handled the transition
away from LIBOR, how FINRA implemented the TRACE System, or other
models from financial or commodity trading markets?
D. Written Documentation Options
1. Should AMS require covered packers to submit annual
documentation to AMS describing how the packer plans to conduct market
activities in a fair manner, participate in price discovery for fed
cattle, and ensure market access for small and medium-sized feeders?
2. Please comment on how packers should plan to structure market
participation and procurement methods to contribute to market price
discovery. Provide specific details about actions packers should take
to achieve these goals and any market information or data that could be
provided to the industry on a voluntary basis to improve market
transparency.
3. What role should exchange trading play in considerations of
price discovery? For example, for a covered packer to count as
contributing to price discovery, would it be useful to establish a
presumptive requirement that no less than a certain percentage (e.g.,
15% or 30%) of cattle be either exchanged or auction purchased or paid
as a market-making fee to the exchange or auction to cover the risks
and costs of other producers in those transparent, competitive pricing
venues?
4. Please discuss specific problems that feedlot sellers experience
with market access and actions that packers could take to improve
market access, especially for small and medium-sized producers. For
example, would enhanced access to exchange trading be effective in
supporting market access, and could a market-making fee system that
supported smaller producers be helpful--for example, from packers that
chose to make contributing to such fee one part of their contribution
to price discovery under their plan?
5. Please comment about specific concerns related to packer
purchasing behavior during periods of supply and demand disruption
(i.e., pandemics, disease outbreaks, production disruptions, etc.).
What are the important elements of packer plans for maintaining
adequate price discovery and market participation during these times?
6. Were AMS to require packers to report to PSD all pricing
agreements that describe how base prices are determined for all cattle
procured by the packer, describe any specific information or data that
should be required for this documentation or otherwise associated to
make this documentation more useful for AMS to monitor the market.
Should AMS consider any other appropriate documentation requirements of
covered packers?
7. In what ways could it be appropriate and useful for AMS to make
aspects of the information from these documentation reports available
to the public, subject to confidentiality protections? Which ones and
why? Would a firm-specific approach, as opposed to an aggregated
approach, ever be appropriate for public disclosure?
8. Would it be appropriate and useful for AMS to score or rank
covered packers based on their contribution to price discovery,
potentially similarly to how FINRA scores broker-dealers on certain
metrics? \80\ If so, what metrics would be appropriate for the scoring:
cash trade and exchange trading purchases, purchases from smaller
producers, or other factors? Should any deductions be taken, such as
the use of TOMP contracts or delayed packer pickup? Should scoring be
dynamic, such that improvements from year to year are recognized? Would
any scoring or ranking be most appropriate and useful if provided
confidentially to covered packers, or should any ranking be made
available publicly?
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\80\ See, e.g., FINRA, ``Firm Summary Scorecard,'' available at
<a href="https://www.finra.org/compliance-tools/report-center/equity/firm-summary-scorecard">https://www.finra.org/compliance-tools/report-center/equity/firm-summary-scorecard</a> (last accessed Aug. 2024); ``TRACE Quality of
Market Report Cards--Treasuries,'' available at <a href="https://www.finra.org/compliance-tools/report-center/trace/quality-of-markets-treasuries">https://www.finra.org/compliance-tools/report-center/trace/quality-of-markets-treasuries</a> (last accessed Aug. 2024).
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V. Conclusions and Next Steps
Given the background, key regulatory challenges, and options for
consideration outlined in this ANPR, AMS is seeking comment on
potential and preferred paths forward. Comments received in response to
this ANPR will inform AMS's approach to regulating the Nation's fed
cattle markets. Substantive, well-reasoned, constructive comments,
including comments that provide data to support views (for example, are
based on industry surveys), will assist in identifying if there are
unforeseen challenges or viable alternatives before the Agency moves
forward. Comments generally in support or opposition to options
identified in this ANPR will assist AMS in identifying the
acceptability of the presented options in the absence of other
alternatives.
Erin Morris,
Associate Administrator, Agricultural Marketing Service.
[FR Doc. 2024-23528 Filed 10-10-24; 8:45 am]
BILLING CODE P
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