Fed cattle marketing and price discovery have been hot topics to say the least. This past year has shown the cattle industry the vulnerabilities of the packing industry. The cattle industry has done a remarkable job raising cattle that grade Choice and better the past few weeks; in fact, 83 percent of beef production has graded Choice and better. I give genetic selection the biggest influence but I’m sure cattle feeders think it’s their feeding program.
Nonetheless, we are satisfying the consumer. The unemployment rate is currently 10.2 percent, millions of folks are out of work, but they keep on buying beef. The restaurant industry has been decimated but coming back after a few hiccups from COVID-19. We’re back on track and consumers have been forced to cook at home—and they’re buying beef.
Right now, we all think the packers are making too much money. The farm gate to retail price spread is the widest it has ever been. We all know the packer has the leverage and obviously is not afraid to use it. JBS had their best second quarter performance ever during the COVID crisis. They earned $1.135 billion, up 126 percent from $503.1 million for same quarter last year. Their profit margin—earnings before interest, taxes, depreciation, and amortization (EBITDA)—was 20.4 percent of sales; the same quarter last year was 8.9 percent. These are extraordinary margins for a packing business. Even 8.9 percent is remarkable. Back in the old days, packers were like retailers, earning 1 to 2 percent on sales—a low margin/high volume business.
Our problem in the cattle business is leverage—too many cattle, we lose it; too few cattle, we get it back. These past few years have been the only time I’ve ever seen the beef industry make more cattle and sell beef for more money at retail. The average retail price for all beef has been between $5.75 to a high of $6.88 last June.
The industry has been busy trying to find new ways to achieve price discovery. At the NCBA mid-year meeting, they were faced with two alternatives to getting more cash negotiated sales. One, do it internally. Have cattle feeders in the various regions step up to the table and sell more cattle on the cash market. It’s like a buying pool where everyone in the Southern Plains region offers a few cattle each week to the cash market.
After following negotiated cash trade the past few weeks, I think it’s starting to happen. Last week the Texas-Oklahoma region had 18.9 percent cash sales, yet they are typically between 5 to 10 percent. Kansas was at 23 percent cash sales. Nationwide cash sales volume was 33.2 percent, which according to Stephan Koontz, professor at Colorado State University, who has been studying price discovery, is more than enough cash sales for price discovery.
The second option is legislative, which means Sen. Chuck Grassley’s 14/50 proposal—50 percent negotiated cash trade to each plant and delivered in 14 days. This proposal has the industry split. And proponents want to include the proposal through Livestock Mandatory Price Reporting, which is to be reauthorized this next month. I doubt the proposal will get much traction. It doesn’t seem to fit in the legislative playbook during an election year, nor in budgets, which will end up as continuing resolutions.
The board at Certified Angus Beef (CAB) is concerned about the 14/50 proposal and how it would affect their business and cattle producers, who try and breed the best cattle possible for the CAB brand. The brand generates over $92 million a year for producers.
They pose these questions to the industry: How will negotiated grids be handled under the proposed requirements? Will they be considered part of the negotiated spot market, given prices can be negotiated weekly without a written or implied contract with a packer or excluded from the spot market due to their grid structure?
Why are dairy and dairy crossbred cattle, cattle over 30 months of age and foreign-born cattle excluded from the proposed 50 percent spot market purchase requirement and how to do these excluded populations factor into the 50 percent spot market purchase calculation for a plant?
What will the impact be on value-added programs such an age-and-source verified, NHTC, GAP, etc. and negotiated feeder calf prices, if a feeder’s ability to secure a fed-cattle market is not assured to place the cattle on feed?
There are a lot of concerns about the 14/50 proposal. Negotiated cash trade is adequate in all feeding regions except for the Southern Plains where there are large feeders that prefer alternative marketing agreements. — PETE CROW
