System Errors Produce Millions in Losses

July 2, 2001

The National Cattlemen's Association says errors in USDA's price reporting system cost cattle producers $42-54 million, but it's not known just when the injury actually occurred. The errors resulting in the loss occurred when prices were inaccurately calculated, under the USDA mandatory price reporting system that went into effect on April 2.

"Economic estimates show that American cattle producers lost between $42 and $54 million between April 27 and May 18, because of a government reporting error," said Chuck Lambert, NCBA chief economist. "While there is some question concerning when the injury actually occurred, it is clear that there were significant losses to many individual producers because of an inaccurate price formula."

On May 16, USDA's Agriculture Marketing Service announced that prices for "no-roll" products had been incorporated into choice and select product prices reported nationwide. Price reports have been accurate since May 16. Following the announcement of the error, NCBA commissioned two economic studies simultaneously, without consultation, by top economists from Virginia Tech and Kansas State University.

"Now that we have the economic analysis, we are in a better position to consider remedies and determine next steps," said NCBA President Lynn Cornwell and a cattle rancher from Glasgow, MT. "There are many factors influencing the cattle market and a variety of ways to calculate the impact of those factors. We are sharing this data with state beef organizations now so that NCBA members can provide clear direction, based on the best available information, on how to proceed. We plan to consider all available options, including legal recourse and financial compensation, over the next few weeks."

The most defensible amount for a total loss to the industry from these analyses is $42 million. Wayne Purcell of Virginia Tech said the potential loss could be as high as $54 million, but acknowledged the complexity of debating that losses would have extended through the week ending May 26. Both analyses determined that there were no producer losses attributable to errors in boxed beef price reporting during the April 2 through April 20 period.

A Kansas State analysis indicates that losses began during the week of April 21-27 while the Purcell analysis does not show losses beginning until the week of April 28-May 4. The Kansas State losses tend to be spread more evenly across the four-week period while losses in the Purcell analysis tend to increase in the later weeks.

Purcell states that fed cattle prices during late March and early April were likely to decline from nearly $80/cwt to the $76-$77/cwt. range due to factors other than errors in boxed beef price reporting. (Most likely improved cattle performance and an increasing supply of market-ready cattle following the worst winter weather in eight years). This factor explains the positive numbers of $4.82 and $1.34 during the first two weeks of April. However, his analysis also shows that the last $2 to $3/cwt. decline in fed cattle prices during the April 2 through May 25 period can likely be attributed to errors in boxed beef price reporting.

He did not evaluate impacts on calf and yearling prices, and all impacts to those sectors come from the Kansas State analysis with modifications to account for price impacts in futures market contracts versus the cash market during the April 2 through May 25 period. The K-State analysis assumes that out-month live cattle futures markets were impacted the same as the fed cattle cash markets. Subsequent review of futures market activity in the August and October live cattle futures markets indicate that was not the case.

Impacts of prices on calves and feeder cattle were modified to reflect price activity that actually took place in the futures market contract months. These modifications are also consistent with Purcell's determination that fed cattle prices were likely to have declined from price levels during late March and early April due to factors unrelated to errors in boxed beef price reporting.

In reality prices in the October live cattle futures contract (impacting prices for lighter-weight calves) declined $1.75/cwt. compared to a decline of $5.45/cwt. decline in the cash fed cattle market (32.11 percent). Prices in the August live cattle futures contract (impacting prices for heavier-weight feeder cattle) declined $2.25/cwt. compared to a decline of $5.45/cwt. decline in the cash fed cattle market (41.28 percent).

There is also general consensus that losses in the calf, yearling and fed cattle markets would not be additive. That is, a cattle feeder who sold fed cattle but purchased feeder cattle or calves would have to adjust negative revenue impacts from the sale of fed cattle by the amount of "savings" gained from purchasing feeder cattle or calves at lower than expected prices. The same would be true for a stocker operator selling heavy cattle but buying replacement cattle in this four week period. Any system developed to reimburse producers for losses due to boxed beef price reporting errors during the April 2 through May 18 period would have to account for cattle purchased during that period in addition to cattle sold.