Dozens of senators have asked the USDA and Department of Justice to investigate the meat packing industry for price fixing and collusion. Investigating meat packers is something that cattle producers are compelled to do every 15 to 20 years. Perhaps it’s a generational thing. We have always had the big four packers and a smattering of medium-sized ones, and then the country locker plants.
The advent of the COVID-19 virus has disrupted just about everything in the world, but the remarkable thing is that food keeps on moving. We have one of the best food distribution networks in the world. However, the virus has exposed some weak spots, which essentially comes down to people.
People run these beef packing plants. Most are immigrants—seasonal or refugee workers. But they have contracted the virus in these plants. These folks work hard and fast and are close to one another. Many became sick or are afraid to go to work because they don’t want to take the risk of getting sick and possibly dying.
This is serious stuff, but our beef processing capacity shrank about a third overnight. And cattle prices went down because we currently have too many fed cattle that need processing. Conversely, the price of beef has risen to record level, with Choice boxed beef at $475/cwt, creating a huge disparity between the farm to wholesale margin, which usually hovers around 50 percent. Fortunately, some packers realize the disparity and started paying more for the good cattle; $117 was the high price last week.
The packer margin index is how we keep track of packer profits. When it jumped over $500 per head, the folks who do the calculation quit doing it because it didn’t reflect reality. Packer costs have risen dramatically to keep people safe and give them the incentive to come to work. So, I’m telling you they haven’t been making $600 or more a head on every head they process.
The spot market doesn’t reflect what’s really going on. Most everybody who buys beef consistently is on formula. Grocers don’t negotiate a cash price for every pound of beef. They run on seasonal patterns and index prices and kind of know what their needs are. Grocery store chains are interested in a consistent supply. There might be a little more negotiation when Kroger Stores wants to run a ribeye special and needs 30 loads of them. And Kroger might have to buy from all four to make their special work.
Can you imagine your local grocer not having hamburger in the meat case? Well, it happened. But no user of ground beef wants to get caught short, so price doesn’t really matter; they’ve got to have it. This is when spot prices go ballistic. Wendy’s hamburger chain announced a week ago that 18 percent of their stores would not be serving hamburgers. Can you imagine what kind of business killer that is?
When you see the spot market for Choice beef at $475, it may be on less than 100 loads. Our collective packers ship about 5,000 loads of beef a week. The comprehensive cutout report put out by USDA had all beef priced at $391.33 on 4,564 loads, from Prime beef to ungraded beef. A total 2,484 loads were sold on a formula price, and from what I understand there are many formulas used, and they are proprietary.
If you really want to understand beef markets, read some of these USDA reports—there’s a lot of good information there—or look at our markets page; it’s the most comprehensive market page published. Much in the beef and cattle industry is extremely transparent. Mandatory Price Reporting has done a good job. They could do a better job, and you’ll have a chance to change things this fall.
Now, about this idea of mandating that each packing plant buy 50 percent of their cattle for delivery within a 14-day period. My first thought is why on earth would you want the government involved in your marketing system? This will cost everyone in the beef supply chain money, Steven Koontz, ag economist at Colorado State University has studied the cash fed cattle market more than anyone I know.
How much of a cash market do we need? I’m pretty sure that they guys wanting the 14/50 program would settle for a 21/30 deal. But will it be all that useful? We all love an auction—it’s the most transparent market you can find.
Can you imagine Cactus or Five Rivers feeding companies selling 300 loads a week going toe to toe with the cattle buyer? They want to know they’re sold six weeks before they are ripe. — PETE CROW
