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Did the Mandatory Requirement Aid the Market? Impact of the Livestock Mandatory Reporting Act
Janet Perry, James MacDonald, Ken Nelson, William Hahn, Carlos Arnade, and Gerald Plato
Outlook Report No. (LDPM13501)
46 pp, September 2005
In 1999, Congress passed legislation that led to a major redesign of the livestock price reporting
system through the Livestock Mandatory Reporting Act of 1999 (LMR). With the legislation expiring
in fall 2005, stakeholders can benefit from an investigation of developments leading up to the
Act and an assessment of the Act's impact on cattle markets after its implementation by USDA in
2001.
What Is the Issue?
Traditionally, agricultural product prices were determined in open spot markets, either in direct
negotiation between individual buyers and sellers (or their agents) or in public auctions (which
now include satellite and internet auctions), based on attributes observable in livestock or crops.
The voluntary system of reporting these transactions formed the basis for published price information
for many years, with substantial public and private investments in organizing transactions,
certifying grades, and reporting terms and prices. However, fed cattle volume sold in spot markets
began to fall sharply in the 1990s, with a concomitant increase in cattle moving under alternative
marketing arrangements, such as contracts. By 2000, daily cash trades had thinned so much that
Market News was not releasing market prices in 60 percent of daily reports from the major markets
in Colorado, Kansas, Texas, and Nebraska. That shift from spot markets called into question
the effectiveness of voluntary price reporting.
Producers expressed concern that unreported contract prices were substantially higher than the
cash prices reported in Market News and that Market News prices based on a small number of
transactions could be more easily manipulated. Some feared that cash markets for livestock would
disappear without timely, comprehensive, and accurate price reporting. Because many contracts
based payments on cash market prices, cash market erosion concerned all market participants. In
short, there were understandable reasons for concern about the future of voluntary price reporting
in the late 1990s.
What Did the Project Find?
Under a mandatory requirement, large meatpackers electronically file summary information twice a
day on all transactions involving live cattle purchases and beef sales, and USDA's Agricultural
Marketing Service compiles the information in its Market News reports. By early 2002, the program
was capturing more than 90 percent of commercial cattle slaughter, compared with less than 60 percent in the last days of the voluntary system. Livestock mandatory reporting did not simply expand existing reporting
procedures to more transactions; rather, it introduced major changes in the ways that data from all covered livestock
transactions were collected, organized, and disseminated through reports.
LMR enables users to compare prices for cattle sold under different marketing methods. It appears that, for cattle of similar
quality, prices in negotiated spot market transactions closely track prices for cattle sold under alternative marketing
arrangements. Any difference was small and inconsistent; negotiated prices actually exceeded formula prices in nearly
40 percent of the weeks observed. Moreover, in regression analyses of the spread between cattle prices and boxed beef
wholesale prices, for cattle of similar quality, prices in negotiated spot market transactions closely track prices for cattle
sold under formula pricing.
Many producers initially expressed disappointment with LMR, indicating in a survey that the program was not as beneficial
as expected, because the data did not show that contract prices were higher. But, producers now appear to be using
the cash market more: after 2002, cattle sales shifted away from formula pricing and contracts and toward negotiated,
cash market transactions. While that shift may have been driven by other market developments—such as low inventories
and strong demand—that raised all cattle prices, it also may have been affected by expanded and more transparent
price reporting under LMR.
How Was the Project Conducted?
First, we reviewed the traditional voluntary system of USDA price reporting and described the economic forces that
cast doubts about the effectiveness of the voluntary system and led to mandatory price reporting. Using Market News
data, we then evaluated trends in cattle volumes moving through different types of transactions before and after
implementation of LMR. We selected average reported cattle prices (per hundred-weight) for each pricing basis, transaction
type, quality grade category, and cattle class reported in a week, and compared those prices with those found
in voluntary reporting. We report on prices and volume sold for five different purchase types: (1) formula net, (2) forward
contract net, (3) negotiated cash, (4) negotiated grid base, and (5) negotiated grid net. Regression analysis modeled
the differences in volatility between the two price-reporting systems and price differences among transaction
types. Finally, we assessed the impact of LMR on price discovery, using futures prices as our indicator.
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