This COVID-19 virus situation will change the world, hopefully for the better. It seems like most of the world is angry at China for their handling of the virus but it’s going to make everyone realize their vulnerabilities.
It’s perplexing that the beef packing sector has a problem doing their job and cattlemen must pay the price. Packing capacity and beef production are so closely matched that there isn’t any room for error. The beef supply chain is an independently operated, finely-tuned system. The industry collects cattle from all over the country. From large producers to small passive ones, we consolidate cattle into like groups, then we inventory them into feedlots until they are ready to be processed.
Then the industry relies on four companies to process the cattle into beef and distribute it to consumers through grocery stores or restaurants. But when one sector has a problem it affects the other. Drought or animal health issues affect producers. Broken packing plants and labor issues affect packing throughput. One has economic impact on the other. We need each other.
Poultry and pork producers have figured out ways to smooth out the gaps, and that is through vertical integration, something the cattle business doesn’t seem too interested in.
In the past six months we’ve learned a lot about market risk, and if the packing industry continues to create risk episodes in the supply chain, it will be detrimental to all. The Tyson fire in Kansas appeared to create more problems than it should have. Packers quickly rerouted fed cattle to other locations so they could fulfill Labor Day orders.
The COVID-19 pandemic created labor issues that were surprisingly unforeseen. Packers adjusted the way they do business, creating safe zones for workers and providing personal protective gear. Workers have their temperatures taken, go through a spray booth, walk through foot baths and are closely monitored for symptoms. The just started testing employees to remove any doubt they may have the virus. Packers are sparing no expense to keep this essential business going. Those big margins they were making have vanished in many plants because of the extra cost.
Everyone is trying to do their part to keep the beef supply chain operable. So, what are the real problems facing producers? Packer vulnerability, plant, equipment, and manpower. If any aspect of the supply chain fails, it creates panic. And panic always manifests itself in the market. First it’s the futures markets, then all heck breaks loose. Futures prices and cash prices haven’t been very symbiotic lately.
Do you realize that livestock contracts are the only segment of the CME business that deals with a live commodity? All the others deal with an already harvested commodity that is relatively stable. Mother Nature is the only real threat to the grain business, and perhaps distribution.
The futures markets can be a great risk mitigation tool. I will agree it takes a bit of effort to understand how they work, and the price of an education in how to use options or the contract itself will cost you something; I call it tuition. Information moves too fast today and before you realize it the market is lost. When a hedging opportunity comes along, they generally don’t last long.
Why don’t we have a boxed beef contract?
Right now, we have two situations affecting the cattle business. Packers are having problems staffing their plants with healthy employees. They have had to rearrange their production situation in order to keep employees safe. These workers are hard to find, don’t speak much English and are scared to show up to work. You can’t blame them.
Then we have a dramatic market swing which has put producers under a tremendous amount of financial stress—to the point of going out of business.
Cattlemen are angry and have asked USDA for an in-depth investigation into the beef/cattle complex. They don’t know what they are looking for but I’m sure if they see it they’ll know it. You can’t blame producers for being angry. It seems that when a packer has a problem and can’t do their job, producers are the ones who pay for it.
NCBA has convened a new live cattle marketing committee which sent a letter to Secretary Sonny Perdue asking for a market investigation concerning the market disparity of low live cattle prices and high boxed beef prices when the packing industry has production issues. We need some fresh horses in the livestock marketing game. — PETE CROW
