The Role of Market Information in Analysis and …...The Role of Market Information in Analysis and...

United States Department of Agriculture

Agricultural Marketing Service

The Role of Market Information

in Analysis and Decision-Making

Michael E. Sheats

Director, Agricultural Analytics Division

Livestock and Poultry Program


U.S. Department of Agriculture

DG AGRI Workshop on

Market TransparencyPhilippe le Bon Building

Brussels, BE

May 30, 2018



“Information is the currency of democracy. “

- Thomas Jefferson

“As a general rule, the most successful man in life is the man who has the best information. “

- Benjamin Disraeli



The Evolution of Price Discovery in the U.S.

• 1796 - George Washington, proposed the establishment of a National

Board of Agriculture to collect and diffuse information to “assist a spirit

of discovery and improvement.”

• During the first half of the 19th century, access to market information

was limited and cost-prohibitive.

• Buyers with more current and detailed market information had an

advantage over farmers, often preventing farmers from getting a fair

price for their goods.



• 1839 - Congress appropriates $1,000 to the Patent Office to compile

and disseminate agricultural statistics.

• 1862 – Abraham Lincoln establishes the “People’s” Department - USDA.

• The Second Industrial Revolution in the U.S. (1870-1914) brought rapid

urbanization, territorial expansion, and improved transportation,

opening new markets to American farmers.

• Local markets became less of a factor in pricing as the market for

agricultural commodities became increasingly more national.

• By 1920, more people lived in cities than on farms.




• The rapid expansion in markets was hampered by the lack of market

transparency and access to accurate market information.

• This led to simultaneous gluts and scarcities in markets throughout the

country as marketers tried to operate in the dark.

• Private market information existed but was localized and self-serving.

• In 1912-13, Congress authorized the Secretary of Agriculture to

investigate the cost of food supplies at the farm and to the consumer.




• The Agricultural Appropriation Act for 1914.

• Directed USDA to acquire and diffuse among the people of the

United States useful information on subjects connected with the

marketing and distribution of farm products.

• Led to the creation of the Office of Markets, the first marketing

agency in the USDA and the first market reports in 1915.




• The Agricultural Marketing Act of 1946

• Provided the legal authority for the modern U.S. agricultural

marketing information system.

• Authorized USDA to collect and disseminate marketing information

for the purpose of…

• anticipating and meeting consumer requirements,

• aiding in the maintenance of farm income, and

• bringing about a balance between production and utilization

of agricultural products.




• The Agricultural Marketing Act of 1946 expanded Government

involvement in livestock markets...

• to improve the general functioning of these markets by providing

them with better and more widely available information, and

• to protect livestock sellers from economic exploitation by

meatpackers.

• The resulting Market News program used voluntarily reported prices

for livestock and meat as the basis for market information.




• Initially, the voluntary reporting system was based on cash or negotiated

transactions where the price was determined through buyer-seller

interaction, mostly in public auction venues.

• Over time, this negotiation moved from the public arena to private

negotiations between buyer and seller conducted at the point of production

– direct marketing.

• This made it increasing more difficult to conduct price discovery.





• By the 1990’s, negotiated cash marketing was becoming less common

as the use of alternative marketing arrangements (AMA’s) such as

forward contracts and formula pricing expanded.

• Concerns about concentration in the meat industry and the lack of

public disclosure regarding AMA’s led to questions about price

discovery and market efficiency.

• To many, these fears were realized in 1998 when hog farmers

experienced sharp declines in the prices they received for hogs sold in

the open market (spot prices) when supply exceeded slaughter

capacity.




• At that time, fully 70 percent of hogs were procured through

alternative marketing arrangements at prices not available to the

voluntary USDA market reporting program.

• A similar situation existed in other livestock and meat markets. In

some cases, less than 5 percent of production was used to establish

prices for the other 95 percent.

• In response, in 1999, Congress passed legislation to increase livestock

market transparency through an amendment to the Agricultural

Marketing Act of 1946.



Livestock Mandatory Reporting (LMR)

• The Livestock Mandatory Reporting Act of 1999 (LMR)

• Imposed mandatory price reporting for most livestock transactions.

• Required major meatpackers, processors, and importers to report all

transaction data relating to prices paid for cattle, sheep, and hogs; and

prices received for lamb, beef, and pork products.

• Allowed USDA to capture information on more transactions than under

voluntary reporting, including information about AMA’s.

• Improved the flow of transaction information and price discovery

in the marketplace.




• Must be reauthorized by Congress every 5 years.

• With each reauthorization, amendments have been added to the law

that…

• expand the scope (pork cuts in 2010),

• address changes in marketing patterns (swine and lamb reporting

requirements in 2015), or

• improve the quality of the information collected.

• Input from covered industries are sought ahead of each

reauthorization to better inform the reporting process.



• Who Must Report?

• Packers who annually slaughter at least 125,000 cattle, 100,000 hogs,

or 35,000 lambs.

• Importers who import an average of 1,000 metric tons of lamb meat

annually.

• Companies who slaughtered an average of 200,000 sows, boars, or a

combination thereof, per year during the immediately preceding 5

calendar years. (could have multiple plants)




• Current market coverage under LMR:

• 94% of the live swine market

• 79% of the live cattle market

• 46% of the live sheep market

• 87% of the wholesale pork market

• 93% of the wholesale boxed beef market

• 57% of the wholesale boxed lamb market




• Benefits of LMR:

• Increases the flow of market information, better informing the broader

market and ensuring that no marketing group is disadvantaged by lack of

information (increased market transparency).

• Widely used for decisions ranging from day-to-day marketing of livestock

and meat products to long-term investments and policy to meet changing

consumer demand.

• Improves the efficiency of private sector entities in marketing agricultural

products, resulting in increased returns to producers and lower costs

to consumers.




• Challenges of LMR:

• The share of negotiated cash transactions has declined and the use

of AMA’s increases as confidence in LMR as an accurate indicator of

market price has increased.

• Increased consolidation and vertical integration of companies

impacts confidentiality requirements and the ability to publish data.

• Loss of the daily interaction between USDA and its industry contacts

that provided the market context missing in LMR –

the “Sense of the Market”.





• Continuous changes in production and marketing methods (i.e.,

increased use of meat prices to establish the base price of live

animals; increased value-added product differentiation.)

• Most producers lack the knowledge of processing and fabrication

costs, yields, and processes necessary to a basic understanding of

the use of meat prices to price live animals.





• One of the greatest challenges created by LMR is the overwhelming

amount of market data it provides – far more than most non-market

analysts can absorb or understand.

• Could lead to increased information asymmetry in the marketplace.

• Under LMR, an average of 215,000 transactions are reported each

week (11,000,000 per year).





• LMR provides the “What”.

• But marketers need the “Why” to better understand what is

happening.

• The “What” and the “Why” form a more complete picture of the

market, allowing marketers to anticipate and respond to market

trends.




• The 2008 Farm Bill directed USDA to improve the presentation and

accessibility of LMR published information.

• This was intended to provide more outreach to help producers better

understand the reported data.

• This led to the development of interactive data visualization tools,

called livestock dashboards, for cattle, boxed beef, swine, and lamb.

• These dashboards provide users with a real-time look at the status of

certain markets.




https://www.marketnews.

usda.gov/mnp/ls-home



• USDA Production and market information is used in the evaluation of

all commodities purchased for the School Lunch and other domestic

feeding programs.

• Market information is used in formulating official USDA outlook

forecasts.

• It is used in support of a range of economic and statistical activities.

• Used to inform policy-making and planning.

• Used in the development and support of a range of Departmental

services.

Use of Market Information in USDA Decision-Making



• National Agricultural Statistics Service (NASS)

• Conduct regular statistical surveys covering virtually every aspect

of U.S. agriculture.

• Conduct the Census of Agriculture every five years, providing the

only source of consistent, comparable, and detailed agricultural

data for every county in America.

• 2017 Census will be released in December 2018.

Other Sources of Market and Production Information



• Foreign Agricultural Service (FAS)

• Export Sales - information on U.S. export sales, by commodity and

country of destination, updated weekly.

• Global Information - insight and analysis from FAS's overseas offices on

issues affecting agricultural production and trade.

• Production, Supply, and Distribution - data on production, supply and

distribution of agricultural commodities for the U.S. and key producing

and consuming countries.

• Agricultural Trade Data - current and historical data on international

trade in agricultural, fish, forest and textile products. Source from the U.S.

Census Bureau




• The World Agricultural Outlook Board (WAOB)

• Part of the Office of the Chief Economist

• Serves as USDA’s focal point for economic intelligence and the

commodity outlook for U.S. and world agriculture.

• World Agricultural Supply and Demand Estimates – provides

monthly forecasts of major agricultural commodities.

• Prepared by the Interagency Commodity Estimates Committees

(ICECs) comprising representatives from several key USDA

agencies, including AMS.




• Economic Research Service (ERS)

• Anticipates trends and emerging issues in agriculture, food, the

environment, and rural America and conducts high-quality,

objective economic research to inform and enhance public and

private decision making.

• Provides context for and informs the decisions that affect the

agricultural sector, which in turn benefits everyone with efficient

stewardship of our agricultural resources and the economic

prosperity of the sector.




• Quality Grading

• Oversees the application of official USDA grade standards.

• These USDA grade shields, official seals and labels are reputable

symbols of the quality and integrity of American agricultural

products.

• Large-volume buyers such as grocery stores, military institutions,

restaurants, and even foreign governments use the quality grades

as a common “language," making business transactions easier.

• Data provides insight into consumer trends.




QUESTIONS?

“Information is the oxygen of the modern age.“

- Ronald Reagan

[email protected]

The Role of Market Information in Analysis and …...The Role of Market Information in Analysis and...

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