Since the 2019 fire at the Tyson plant in Holcomb, Kansas a lot of attention has been given to the volume of fed cattle traded through different transaction types, largely due to concerns over price discovery.
Fed cattle sales are categorized into two types; negotiated and non-negotiated sales. Negotiated transactions are sales made in the cash or spot market, and include negotiated cash sales and negotiated grid sales. Non-negotiated transactions are sales in which at least the base price is not negotiated in the time immediately preceding the transaction. Non-negotiated transaction types include formula sales, forward contract sales, and grid sales.
A major difference between the two is that negotiated sales contribute to price discovery, while non-negotiated sales do not. Price discovery is the result of an interaction (bid and ask) between buyers and sellers. The base price for a non-negotiated sale is often based on negotiated prices in the time period immediately preceding the sale, but the sales themselves do not contribute to price discovery.
Negotiated trade volumes as a share of total trades have declined in 2022 when compared to both 2021 and the previous five year average, regardless of region. Though negotiated trade as a share of total trade remains high in regions like Iowa-Minnesota and low in regions like Texas-Oklahoma-New Mexico, the share of total transactions that are negotiated has dropped across the board. Interestingly, this trend is not coupled with lower fed cattle prices, as slaughter cattle prices have remained higher than 2021 and the previous five year average through 2022, and have been relatively stable.