Federal shutdown impacts South Dakota cattle producers

Farm Forum

BROOKINGS – The recent federal shutdown has affected two of South Dakota’s largest cattle markets – the calf and feeder markets – explained Matthew Diersen, Professor and SDSU Extension Risk Management Specialist.

“In South Dakota livestock markets are usually well-functioning with good price coverage, however the federal shutdown has affected the calf and feeder-weight cattle segments hampering routine price discovery and the ability to transfer risk,” Diersen said. “These markets are the largest livestock sector in terms of economics and the number of producers affected by price changes.”

He explained that prices for calves and feeder cattle are normally monitored and reported by the U.S. Dept. of Agriculture’s Agricultural Marketing Service (USDA AMS). However, with the shutdown, the market reporters were furloughed.

The AMS reports prices for fed cattle, swine, forages and many other crops.

“The prices are compiled into state and national price series and monitored and used by sellers and buyers seeking a fair value,” Diersen said. “A key series affected is the Chicago Mercantile Exchange’s (CME) feeder cattle index, which is a weighted average of AMS prices.”

Diersen further explained that series is used as the settlement price for feeder cattle futures contracts. He added that the CME Group has issued several statements regarding their contingency plans for the index and settlement of feeder cattle and other livestock contracts.

“So, what are cattle worth this week? That is more difficult to answer,” he said.

With these trusted sources temporarily shut down, Diersen said one could scour the Internet, call around, and try to watch and read the details of cattle traded at the dozens of auctions in South Dakota.

“Then, you would need a network to do that in the other states with cattle. And you would need to try to exclude from your view any cattle that are too big, too small, too thin, too heavy, too fancy or with any feature different from the quality grade used in past valuations,” Diersen said.

Livestock risk protection part of shutdown

One would also observe this week that feeder cattle are being valued at all-time high levels. Thus, for anyone considering selling cattle in the future, Diersen said those values have risen also.

“That leads to a second problem,” he said. “Without knowing with some certainty what ending price would be used to settle a futures or options contract, potential sellers may not be as willing to price or protect cattle.”

The other obvious choice for producers with high prices is buying insurance coverage. Diersen explained that typically they would use Livestock Risk Protection or a similar insurance product. However, the staff at USDA’s Risk Management Agency responsible for administering those programs has been furloughed.

“Thus, one cannot purchase that coverage,” he said. “In addition, those products settle to the CME’s feeder cattle index too. Without a reliable index it is not clear what price will be used to settle existing or new contracts.”

Diersen said that should an alternative index be needed, potential change in the make-up of the index is a likely scenario, and it may lead to basis risk or less effective management of risk.

For producers, the implication is to make the best of the situation. Those wanting insurance may cover themselves in the short run with put options that could be sold once insurance is again offered. It would also guard against large price moves in the short run. For auctions, they should make as much price information available as is feasible. Quantities traded, weights, and prices are all part of the price discovery that occurs at the auctions that the AMS is unable to provide during a shutdown.