Cast your mind back to 2014. The U.S. cattle industry started that year with a national herd of 95 million head. This was 3 percent below a year earlier and was the smallest herd number since USDA’s data series began in 1973. No one needs reminding that the decline was due to severe to extreme drought across much of cow-calf country from 2010 through 2012.
The herd liquidation that took place had both negative and positive consequences. The decline in cattle numbers forced at least four fed beef plants and six non-fed plants to close. Cargill in 2013 closed its 4,650-head-per-day plant in Plainview, TX, and National Beef in 2014 closed its 2,000-head-per-day plant in Brawley, CA. Tyson Foods in 2015 closed its 2,100-head-per-day plant in Denison, IA, and PM Beef Holdings closed its 950-head-per-day plant in Windom, MN. Only the Brawley plant later reopened.
Meanwhile, cash live cattle prices began to climb because of the tighter cattle supplies. The price of a five-area Choice steer averaged $114.73/cwt live in 2011, $122.86/cwt in 2012 and $125.89/cwt in 2013. It averaged a record $154.56/cwt in 2014 after hitting a weekly record of $171.38/cwt the week ended Nov. 29. Annual prices then declined to $148.10/cwt in 2015 but that did not prevent fed beef processors from all losing money. Feeder cattle prices enjoyed the same trajectory to record levels in 2014 and 2015.
Fast forward to today and live cattle prices and packer margins have a totally different relationship. Cattle prices have been stuck in a $118-120/cwt range for the past two months, while packer margins have soared. This has invoked considerable angst and a lot of handwringing from many cattle producers and their organizations.
A coalition of producer groups has responded with the following demands: Expand beef processing capacity; broaden labor policies to strengthen the beef processing workforce; increase transparency in cattle markets by reauthorizing Livestock Mandatory Reporting (LMR); support industry efforts to reform “Product of the USA” generic labeling; and ensure proper oversight of cattle market players by concluding the ongoing U.S. Department of Justice investigation into the meatpacking sector.
I respect any efforts to help producers get more money for their cattle. But the above demands ignore the key driver of the U.S. cattle and beef markets. The price of virtually every product sold on an open, unregulated market is based on supply and demand, and the cattle/beef complex is no exception. Live cattle prices hit record highs in 2014 because demand for fed cattle far exceeded the available supply at the time.
The tight cattle supply gradually gave way to larger numbers, and then came the unprecedented impact of the COVID-19 pandemic. Its impact on the supply side of the market was to back up record numbers of cattle in feedlots, a backlog that is yet to be cleared. Cattle feeders lost all leverage over packers and will not start regaining it until October when the backlog is forecast to be eliminated. Meanwhile, beef demand soared at retail because of the pandemic and has remained extremely strong to this day. This had enabled packers to sell beef at historically high prices (apart from what happened last April and May due to COVID-19). The result is huge packer profits. But there is nothing illegal about those. This is simply supply and demand at work.
As for the coalition’s focus on adding slaughter capacity, it ignores two key facts. Daily and weekly slaughter capacity is ample. What is lacking are enough workers to staff plants at maximum capacity utilization levels. Most beef, pork and poultry processing plants in the U.S. are still running 10-15 percent below where they should be because of labor absenteeism at most plants. It seems the coalition ignored what Tyson Foods on May 10 said about its capacity utilization. Its plants over a five-day week are running at only 80 percent of capacity and in a six-day week are running at a full five-day capacity.
I have tracked beef processing capacity and capacity utilization since 1988. That year saw an industry-wide capacity of 145,000 head per day. The total declined to a low of 125,500 head per day in 2016 but currently stands at 133,225 head per day in the 68 largest beef slaughter plants in the U.S. Another 4,000 head of daily capacity is on the books to be added in the next two years or so. My fervent wish is for industry leaders to acknowledge the supply-demand forces at work and to focus on developing a new mechanism to price live cattle such as I discussed in my column last August. — Steve Kay
(Steve Kay is editor/publisher ofCattle Buyers Weekly,an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707-765-1725. Kay’s Korner appears exclusively in WLJ.)
