Changing Grid Premiums and Discounts Due to Underlying Changes in the Fed Cattle Industry

Abstract

In recent weeks there has been increased attention given to the role of Alternative Marketing Arrangements, commonly referred to as AMA's, in the fed cattle market. The use of these AMA’s varies greatly by region and some of the more common AMA’s used include grid and formula pricing. AMA’s pay producers premiums and discounts from a ‘base price’ based on a combination of the yield grade, quality grade, and weight of dressed cattle. It is common for the negotiated cash price to serve as the ‘base price’ for AMA’s using the either the geographical region or the 5-market average. The decline in negotiated cash trade has varied by geographical region causing some market participants to wonder if the ‘base price’ truly reflects the local demand for cattle. For example, cattle formula priced in Texas using the 5-market average could, in certain weeks, be heavily weighted towards Nebraska and Iowa prices.