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LMC: Base Quotes A Starting Point For Negotiation

29 January 2013

Northern Ireland - Actual paid prices have been shown to be higher than quotes, Livestock and Meat Commission Northern Ireland have said.

Quotes from the processors for U-3 grade prime cattle have shown increases over the last number of weeks and this week ranged from 330-336p/kg.

There is some variation across the plants but in general quotes for steers are 332- 334p/kg and quotes for heifers are 334-336p/kg. Throughput in the plants since the New Year has been similar to the same period last year with 6,821 prime cattle slaughtered last week but reports from some of the plants have indicated the availability of prime cattle has tightened slightly in recent weeks.

With cattle numbers showing signs of tightening and reports from producers of higher prices being available than quotes would suggest it is a useful time to compare base quotes from the plants with the actual prices paid.

Prime cattle are generally paid on a pricing grid which uses a base quote of U-3 to work out the relative value of each individual grade.

Pricing Grid Penalties and Bonuses

The pricing grid was introduced at the same time VIA was introduced and is subject to a further set of penalties and bonuses for in and out of spec cattle.

These have been in place since November 2009. Through careful analysis it is possible to compare quotes against what is actually being paid.

It should be noted however that the quotes, the pricing grid and the associated in spec bonuses/penalties is a rather notional arrangement. In practice the prices paid are driven by the effects of immediate supply and demand issues and negotiation.

The requirements which need to be fulfilled to qualify for the 8p/kg bonus are outlined in Table 1. The bonus payment was introduced in November 2009 to encourage producers to finish cattle within a desired specification which meets the requirements of some of the processor’s major customers.

Additional bonuses are also available for Aberdeen Angus, Hereford and Organic cattle but these cattle have been removed from the data to allow for a like for like analysis.

In December 2012 30.6 per cent of price reported steers and heifers killed in NI qualified for the 8p/kg in spec bonus payment. For the purposes of analysis we have examined the prices paid for 1710 R-3 grade steer prices which, according to the pricing grid introduced, should be 6p/kg below the current base quote for U-3 grade prime cattle.

Figure 1 displays the average base quote for R- 3 grade steers, the R-3 grade steer base quote including the 8p/kg in spec bonus and the average price paid for all R-3 grade steers for the last twelve weeks.

Quotes versus Prices Paid

If quotes were representative of prices paid then the line indicating the average price for R-3 steers should fall somewhere between the other two lines on the graph.

However if we consider Figure 1 it is apparent that the average R-3 steer price (blue line) is actually above the quoted R-3 grade price including the 8p/kg in spec bonus. This was the case for all of the twelve week period outlined in Figure 1. Last week the average price paid for all R-3 steers was 339.8p/kg.

This was 13.8p/kg above the average base quote of 326p/kg and 5.8p/kg higher than the average base quote plus the 8p/kg bonus. This indicates that much higher prices are available than base quotes would suggest.

In spec R-3 Steers

For further analysis, Figure 2 plots the average base quote against the price paid for in spec R-3 grade steers and out of spec R-3 steers. As expected the average prices paid for in spec cattle are higher than the base quote due to the payment of the 8p/kg bonus.

The difference however between the average base quote and the price paid for in spec cattle has shown some variance during the period in question, ranging from 11.2p/kg in the week ending the 18 November 2012 to 15p/kg last week.

This is a significant variation on the expected 8p/kg difference and should encourage producers to negotiate and shop around for deals.

For the purpose of this analysis we have used the average base quote but in all of the weeks under analysis the difference between the average quoted base price and the price paid for in spec cattle was wider than 8p/kg.

Where the differential is wider than 8p/kg in-spec cattle have been paid for at prices higher than base quotes would suggest.

Out of Spec R-3 Steers

If we consider the price paid for out of spec R-3 steers, as displayed in Figure 2, they have been paid more than the average base quote between November 2012 and January 2013.

Prices paid for out of spec R-3 steers would be expected to be well below quoted prices, particularly given some of the penalties supposedly in place e.g. 10p/kg on overweight cattle.

In reality however these penalties are not being strictly enforced as indicated by average prices for out of spec R-3 steers being above the quoted price. The degree to which these out of spec penalties are implemented is strongly influenced by the supply of prime cattle and demand from the market.

In reality the base quotes, the pricing grid and the bonus/penalty structure is used as a guide when purchasing cattle and in many cases acts as a starting point for negotiation.

Producers should remember this when presenting cattle for slaughter. This analysis also serves to highlight the importance of finishing cattle within specification as in spec carcases are attracting higher prices than out of spec carcases.

With only about one third of steers and heifers fulfilling all of the criteria for the 8p/kg bonus there is significant room for improvement in the type of cattle presented for slaughter across the major NI plants.

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