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Here is the winter analogy.
A snowflake just sitting on top of a mountain surrounded by other snowflakes was so harmless at first. However, it soon transformed into a snowball of mass and weight and began to make an impression.
Then, as the mass and weight increased, the harmless snowflakes became snowballs, released from inertia and began to move.
Momentum quickly took over while the snowball was chained with more snowflakes and growing exponentially.
And that explains the broken US cattle market.
Ok, let me explain.
This analogy shows that devastating consequences have a beginning. That is, the beginning where the outcome is unlikely to be predicted. To put it another way, all of today’s huge problems started somewhere small, and then additional forces interacted to produce catastrophic results in this example.
So to solve today’s gigantic problem, the collapse of today’s cattle market, we have to go back to that problem first.
The big problem today looks like this: Competitive market revenues once allocated to US cattle producers have been hijacked and redirected to beef packers and retailers, creating a discrepancy between cattle and beef prices. This is why the price of beef continues to be severely depressed while consumers are paying very inflated beef prices. Despite today’s rising cattle prices, the gap between cattle and beef prices has historically remained large.
Now we know the tragic ending, but where did the destructive power of this snowflake turn into a snowball come from?
Not long ago, the four big beef packers ate almost all of the smaller packers, monopolizing market share and being in a position to control who got access to the market in a timely manner. They posed market access risks to cattle producers. No one knew what the outcome would be, so Snowflake was pretty harmless.
But around that time, consumers were eating more beef, and have been doing so for over a decade. So packers needed more cattle and were reluctant to deny timely market access to too many cattle producers. was
And while sitting there, Packer began experimenting with new ways to buy cattle, inventing new equipment that complemented the cattle producer’s ability to pinpoint market access risk.
The new device was the Formula Contract. It removed cattle from the competitive cash market, entrusted those cattle to packers, and included no price. This has turned the highly competitive physical market into a residual market. This is the tool packers use to ultimately price all compounded cattle. Snowflakes turned into snowballs and began to make impressions.
And packers began to exploit the market access risk by promising timely market access in exchange for formula contracts. The cow had to be committed through a non-inclusive formula contract.
Then came the snowball acceleration. Beef packers began moving more and more cattle out of the competitive cash market and added more cattle to their formula contract reserves. It was too thin to establish a price.
A new report by Professor C. Robert Taylor shows how and where the divergence between today’s retail beef prices and live cattle prices has arisen.
By downgrading the highly competitive cash market to a residual market and tying formula contracts to that residual market to determine future prices, packers have shifted the risk of buying cattle to the residual market and those who participate in it. .
Taylor’s report argues that because packers institutionalized the link between formula contracts and prices determined in the residual competitive cash market, and that packers were free to enter the residual competitive cash market in accordance with that formula. suggests that it is because it can enter and exit the Contract commitments and projected demand for beef — the residual competitive cash market becomes considerably riskier, and that risk increases exponentially as the volume of formula contracts increases.
Taylor’s findings strongly support our longstanding claim that the use of these formula contracts by packers is inherently unfair and anti-competitive.
This must be resolved legally. Let’s not do any more damage to this snowball.
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