Seems like we’re back in packer hater mode. I suppose about every 20 years or so the cattle industry has to renew their hatred for packers; for some it never goes away. Everyone knows we sure can’t do without them, and we sure don’t like it when they make a boatload of money. Many cattle groups have tried to take beef processing into their own hands and start a packing plant. It’s a tough business; that’s why not many folks do it.
Last week we had another group file a lawsuit against the big four packers alleging that packers deliberately reduced packing capacity to gain leverage over cattlemen and consumers. This time it’s from Pacific Agri-Products in San Francisco, CA. According to their website, they are mostly institutional meat protein distributors. In other words, they are margin operators. They own the meat for less time than the packer does. It appears that some think the meat packing industry should be a public utility.
Obviously, I realize that cattlemen don’t like the price of cattle today. It has been a big letdown since 2013 when cattle supplies were at a low due to widespread drought. It was so good back in those days, I remember one cattleman refused to sell $3, 5-weight calves, hoping for $3.10. It would be great if that was the norm. I would have to say that most everyone in the cattle business knew we didn’t reach a new normal in this business. Things change like they always do.
Now the big four in the packing industry have three major class action suits in play. Everyone in the beef supply chain needs to take some responsibility for where we’re at as an industry. Cattlemen can take some credit for producing better cattle. More cattle are grading Prime than ever before and the value difference between Choice and Prime is extremely wide right now. Beef demand is great because we make a better product. Producers can make choices about which beef market they want to produce for.
Never mind what the packer earns; let’s look at what you can make with the right kind of cattle. USDA’s five-area fed cattle market report the week ending Oct 25 quoted 80 percent Choice cattle traded between $164.96 and $207.41 on a dressed basis. The same class of cattle live traded between $102.03 and $125.74; these prices are what packers paid for cattle. If you can sell fed cattle that are 80 percent Choice and better, that’s $594.30 per head on a 1,400-lb. steer from the low-end to the high-end cattle. So, when we sell Prime cattle at average prices, you’re giving the packer a gift.
But you’re not going to get the premium unless you’re willing to own them and sell them on a grid. Today grid pricing has been a great marketing avenue, but you better know what you have. This means taking some risk which most cow-calf guys don’t really want to do.
But again, there are many ways to defer your risk, and the deferred months on live cattle futures are showing some hedging opportunities with Feb. live cattle trading at $123.10 and April trading at $124.50. Trust me: Feeders are seeing this and hedging their cattle now and it may not last.
If you want to change your situation at the ranch level, upgrade your cattle if you can. I understand that Mother Nature has a big role in what you may be able to produce. But blaming the packers for what they do just isn’t constructive.
These class action suits against the big four packers are not new. They’ve gone on for over 100 years. I would be surprised if any of these suits go very far. But it’s the populous thing to do. And now some want the government involved.
The packing industry is not a national public utility. They are in business just like you to earn a profit. No one can expect them to operate at an unprofitable level. But they’re not a utility company, which is regulated by the government and allowed to make a specific margin. The government turned the health care industry into a public utility, and they are required by law to earn a gross margin.
Regulating meat packing for anything other than food safety is where we want to go. If packers are mandated to make a specific margin on beef products, it will trickle down to the ranch level and you will only be able to earn a specific margin on your cattle. Capitalism and free markets work, but nobody likes the transition of leverage from one sector to another. —PETE CROW
