Cattle Markets React to USDA Reports: Implications for Risk Management
This article was first published in the June 2021 issue of The Nebraska Cattleman magazine.
Public information and agricultural markets help facilitate efficient production markets, reduce information symmetries and inform policy and program formation, operation, and evaluation processes (Council of Food, Agricultural, and Resource Economics, 2013). USDA-NASS is the entity charged with providing this free public information. The Cattle on Feed Report (COF) is one report that particularly useful for cow-calf, feedlots and packers. This report, published at 3 p.m. EST on the third Friday of the month, provides data on the total number of cattle and calves on feed, placements, marketings and other disappearances. The information in this report represents 98% of total U.S. feedlot production and has been often viewed as an important market report.
However, at times, both private and public organizations have questioned the value of producers participating in and USDA reporting the COF report. Some critics argue that if the market does not react to the information then it should not be reported. Proponents of the report argue that the report does add value and then even if it does not, there is still a significant public benefit in reporting the information. In this article, I show that both university academics and government entities agree that both futures and cash prices react to the COF report. I then provide some insights into how these findings can be used for improved price risk management decisions.
Academic studies have focused on how futures prices react before and after the release of USDA reports. For livestock reports (e.g. Cattle on Feed and Quarterly Hog and Pigs Report) the findings suggest that, after 2000, the futures prices move, are small and have been decreasing in size. Researchers point out that the reports themselves are not as important compared to what the market expects the report to say (e.g. market report “surprises”). Positive market report “surprises” are when USDA reported levels are higher than the market expected levels. Negative market report “surprises” are when USDA reported levels are lower than the market expected levels. Of the three primary categories reported by USDA, on average there are negative reactions to placements, positive reactions to marketing and no significant reaction to on-feed surprises.
Implications from Academic Findings
Cattle on Feed measures the level of supply available at a given point in time and placements reflect additions to this supply (Mark and Small, 2007). All else equal, positive surprises in both categories will result in lower prices. If you expect that the market will have positive surprises in these two categories, then utilizing risk management tools that avoid downside risk is warranted. Cattle marketings, on the other hand, reflect reductions in supply, and positive surprises therefore result in higher prices. In this situation, no price risk management is needed. Historically, the futures market tends to value marketings more than other information since feedlots can adjust when cattle come to market even after cattle are placed based on feeding rations.
USDA-NASS has also been interested in determining the impact of their reports on market prices. Their focus has been on how the average weekly cash price changes when reports are released. The “Price Reactions After USDA Livestock Reports” (USDA-NASS 2020) is the report, released each March, that publishes these findings. The report focuses primarily on the impacts of the Monthly Cattle on Feed (COF) and Quarterly Hog and Pigs Report. Table 1 shows a summary of the COF section of the report between 1993-2020. Panel (a) aggregates yearly reports by decades. Panel (b) is select years where major production issues occurred. Panel (c) aggregates report years by whether cattle inventory is increasing or decreasing. Panel (a) shows that cash price movements are larger after the COF report than before, that these price movements have become nominally higher, and that prices do not systematically move in either direction before or after release. Combined, these findings suggest that the report provides useful information for the cash market and that the market is efficient. Panel (b) highlights the importance of supply shocks in affecting the markets’ ability to predict the COF report. During periods of a supply shock, pre-report movements (either increasing or decreasing) are larger in the week before the report than after. Panel (c) shows that when cattle inventory is increasing, the market has greater price movements after the COF reports, suggesting the market is more uncertain about how fast feedlots are going to place cattle to meet consumer meat demand. Overall, these summary findings tentatively suggest that the cash market does react to the COF report.
Implications from USDA Findings
Average cash prices move after the release of the COF report and these magnitudes have been increasing through time and cash price reactions are larger during periods of supply shocks and increasing cattle inventories. In 2021, the cattle market is facing increasing drought conditions. Cash price movements due to the COF report are likely to be larger than in previous years. Risk management is one way producers can eliminate potential adverse local cash price movements while taking on the much more manageable, more predictable, and less volatile, basis risk. Using tools that eliminate downward price risk is likely especially warranted this year.
|Marketing year||A week before COF release||A week after COF release|
|Panel (a): Report Year by Decades|
|Panel (b): Report Year Outliers|
|Panel (c): Report Year by Cattle Cycle|