The Third Quarterly Report on Levels of Negotiated Trade by Region Under the Industry’s 75% Rule

Last year, several pieces of legislation were introduced in the U.S. Congress, with the principal aim of increasing the level of negotiated cash trade.[1] The cattle industry responded to proposed legislation by creating a voluntary framework, known as the 75% rule, that includes cattle feeder and packing plant triggers based on levels of negotiated trade and marketplace participation. The overarching objective is similar to the introduced legislation – to increase the frequency and price transparency in all major cattle feeding and packing regions.

The details and updates to this framework can be found here. To review, the 75% rule framework functions off a series of minor and major triggers. There are eight minor triggers (four cattle feeding and four packer participation). Minor triggers are summed within a quarter and aggregated up from weekly thresholds where three minor triggers equal a major trigger. A major trigger occurring in two of four rolling quarters would prompt the industry to seek legislative action.[2] This policy can be adjusted given updates from literature, industry, and qualifying Black Swan events or ad hoc events that disrupt the normal beef complex, 

This voluntary framework went into effect on Jan. 1, 2021. The first quarter failed to meet minimum requirements – feeder and packer silos combined. The policy states that the National Cattlemen’s Beef Association will seek legislative action if there is a violation in two of four rolling quarters. This implies that the industry must collectively pass the next three successive quarters. The end of June represented the second quarter to be analyzed. This article presents the first update on the regional performance of the industry framework as of Sept. 30, 2021. A detailed analysis of the historical performance and potential considerations, from a previous In the Cattle Markets article, can be found here. The performance of the previous quarters can be found here.

Packer Silos

The packer participation portion of the plan is still under development. NCBA and the meatpacking industry are working through what this will look like, how many packers will need to particiate in each region and what level of trade will need to occur by region. While discussions are underway and preliminary analysis has been conducted, there has been no formal announcement about when or what minor triggers will look like or whether packers have been already participating and passing regional negotiated trade minimums.

Feeder Silos

A feeding region can fail in any given week for one of two reasons. First, if less than 75% of the robust level of negotiated trade occurs in less than 75% of the weeks in a given quarter. Second, if is does not report due to confidentiality. The four cattle feeding areas are 1) Nebraska-Colorado (NE-CO), 2) Texas-Oklahoma-New Mexico (TX-OK-NM), 3) Kansas (KS), and 4) Iowa-Minnesota (IA-MN).

Violations By Region

Table 1, panel (a) reports the violations by calendar week by location. Table 1, panel (b) reports the summary statistics of violations in Q3:2021. Violations occurred in 2 of the 13 weeks for a total of 3 total violations. The KS and IA-MN regions did not violate any weeks during Q3:2021. The TX-NM-OK region violated 1 of 13 weeks and the NE-CO region violated 2 of the 14 weeks. Under the current proposed 75% rule, none of regions would have failed to pass. This is the first quarter that KS has passed, having failed in Q1:2021 and Q2:2021. This increase in passing is a result of more negotiated grid cattle rather than negotiated cash. Of note is that in the NE-CO region, CO failed to report any slaughter for the entire quarter. This has been a reoccurring issue with CO over the last several years. Overall, across weeks and locations, 5.77% of all location-weeks failed to achieve 75% of robust negotiated trade levels. 

Varying Required Trade and Required Weeks

Table 2 shows how varying the assumptions of the 75% policy would have impacted the number of location-weeks violating and ultimately minor and major triggers. This gives some indication of how sensitive regions are to failing minimum requirements. For example, NE-CO had two violations at 75% of robust trade and nine violations at 100% of robust trade. This would indicate that NE-CO are just sligihtly meeting the regional minimums. A similar story held for the TX-OK-NM region. IA-MN has yet to fail in a given week even with tighter requirements on negotiated sales. The greater the percent of negotiated trade required, the more violations occur – 22 location-weeks are violated across all four regions under a 100% of robust trade required, 16 under 75%, and one for 50%, zero for 25% and 5% robust trade.

Discussion

The industry’s “75% rule” was developed in response to proposed legislation to solve potential concerns about thinness in negotiated trade across different regions. In Q3:2021, no region failed and thus no minor trigger would have occurred for the cattle feeding region. The packing region is still under discussion. For reference, one minor trigger occurred in Q1:2021.