Thinking through the virtues of a canned beef index
The CME group launched a Boxed Beef index on March 5. The Index is a five-day, volume-weighted moving average of Choice and Select daily slicing values. It joins CME’s feeder cattle, lean pigs, pork cuts and fresh bacon indexes.
According to CME, the index “will provide a benchmark price that beef producers and end users can use to track and forecast the price.”
To calculate the index, CME uses data collected by the USDA Agricultural Marketing Service and published in the National Daily Boxed Beef Cutout and Boxed Beef Cuts Negotiated Sales – Afternoon report (LM_XB403). USDA has been providing this data, in its current form, since 2004.
Market participants who see the value of such an index may already be calculating something like this or directly using the USDA canned beef cut data.
The index could, in theory, provide an alternative to the base prices negotiated in the cattle pricing formula.
In pigs, alternatives and combinations to find out basic prices are more common than in cattle. The pork or pork market formula category, as reported by the USDA, is a market-based pricing formula for pork, CME Lean Hog, pork, or a pork product. The Other Market Formula category is a pricing formula based on one or more futures or options.
The traded trade in fed cattle has fallen from over 50% of purchases in 2005 to less than 25% in 2020. Market players, especially producers, fear that too few cattle are traded in traded sales to reflect accurately market conditions – and, therefore, the true value of the cattle traded and prepared.
Conceptually, the use of canned beef prices to establish base prices in pricing formulas is attractive, as wholesale beef prices represent market supply and demand for all beef products. . Theoretically, canned beef prices reflect the prices that packers receive for beef products across the spectrum of retail, foodservice and export markets.
As with fed cattle, however, cashless wholesale beef is common. Therefore, the USDA LM_XB403 report, and therefore the CME Boxed Beef Index, is only based on a percentage of all beef marketed and may not represent the true wholesale value of an animal. Some information comes from the USDA’s National Comprehensive Boxed Beef Cutout – All Fed Steer / Heifer Sales Weekly Report (LM_XB463), which incorporates volume from all sales methods. For the week ending April 30, 55% of sales were formula, 27% negotiated for delivery within 21 days, 16% were negotiated for delivery within 22 days or more, and 2 % were subject to a forward contract.
Will the index reflect the “real” value?
The relationship between the prices of live oxen and heifers of all qualities (including negotiated, formula, futures and grid prices) reported in the Complete Weekly National Breed Cattle Report published by the USDA and the Calculated Canned Beef Index provides insight. From 2017 to today, the boxed beef index ranged from $ 68 per cwt to $ 351 per cwt above live cattle prices. This variability in farm-to-wholesale beef prices does not necessarily deter the use of farm-level wholesale prices when producers regularly market livestock. Weekly peaks in the spread can compensate for lows. However, this is more inconvenient for producers who rarely market their cattle.
Of more concern than the week-to-week variability between the boxed beef index and live cattle prices is the trend in the relationship. In 2017, the value of live cattle averaged 59% of the value of the index for canned beef. However, this ratio has trended downward and increased its variability over time. In 2018, the price of live cattle was 56% of the wholesale value, 54% in 2019 and 49% in 2020. So far in 2021, the ratio has averaged 49%. The key point is that using a boxed beef index as an external benchmark price could result in higher or lower fed cattle prices compared to other means of knowing prices. It would depend on the formula used, ie the percentage of the index value of the canned beef.
More research is needed to more fully explain this relationship and the value that can be provided by pricing fed cattle from canned beef values. For example, to say anything about live cattle prices from canned beef values, you also need a drop value. The average by-product value was $ 9.48 per cwt from 2017 to present, with a range of $ 6.71 to $ 12.05 per cwt, according to the USDA By-Product Drop Value (Steer) report FOB Central US (NW_LS441), which provides the skin and offal value of a typical slaughter beef.
Assuming a 1,400-pound beef, that works out to between $ 94 and $ 169 per head. In addition, it is difficult for the standard yields used in the calculation of canned beef values to include value-added products, so the producer would not be able to capture the value of these innovations. Going deeper, it doesn’t catch the ready-to-crate beef, which should continue to gain volume.
Is a canned beef futures coming up?
CME states: “While possible on the road, we have not made any decision to launch a tradable contract yet” and “Currently, we are only releasing the Boxed Beef index as a courtesy to our market participants … “
Developments in the pork market suggest that CME may offer a futures and options contract on canned beef. CME launched the Pork Cutout Index in 2015. On November 9, the Pork Cutout contract began trading. The Pork Cutout contract, along with the Lean Hog contract, improves the ability of pork market players to manage price risk. However, pork may not set a precedent for beef because the markets are clearly different.
A canned beef contract would, of necessity, be a cash-settled contract, due to the difficulties inherent in physically delivering the canned beef to meet the delivery provisions of a futures contract. The newly developed Boxed Beef Index could be used to settle the contract.
Prior to 2017, live cattle prices and canned beef prices were comparatively well correlated, suggesting relatively lower levels of basis or hedge risk associated with cross-hedging canned beef in futures contracts. live cattle. Trading one would have been similar to trading the other. Offering another contract would likely have cannibalized the volume and opened up the interest of the live cattle contract.
A canned beef contract could complement the live cattle contract currently being negotiated. Cattle producers could directly cover cattle whose price could be deducted from the value of canned beef. The packers could directly cover the income or a margin on the meat, ie the difference between the value of the canned beef and the price of the cattle. They could also more accurately cover the prices of individual cuts of beef. Beef buyers and end users could more accurately cover the prices of individual cuts. At times such as holidays, the supply and demand of livestock relative to the supply and demand of beef can diverge.
It remains to be seen whether the Boxed Beef Index provides enough information and value to market participants for CME to launch a Boxed Beef contract.
Schulz is an extension livestock economist at Iowa State University.