What is fake news?
One of the ways to determine what is fake news and what is not, is when the media writes about something that you know the facts about so that you know what the truth is. Were they accurate or not? The New York Times wrote an article recently, “Pork Chops vs. people: Battling Coronavirus in an Iowa Meat Plant.” It was pretty hard on Tyson Foods over their handling of their workers at their Waterloo plant. It was not fake news however but passed my accuracy test for the facts supporting the story. While conditions varied from plant to plant across the country, wherever Covid-19 seriously infected the workforce of Tyson, JBS and Smithfield Foods in particular, I think that they initially pushed their workers beyond safety limits trying to keep plants going, creating Covid-19 hotspots that eventually destabilized their workforces. They did not do the testing or provide the PPE until after conditions blew up in their plants. They only shut down when absenteeism forced them too. Their press releases touting how they put worker safety as their No.1 priority was the fake news. They used their political clout to push back government officials who thought that they should close, which enabled them to sustain worsening conditions all the while their lobbyists in Washington were working hard to gain immunity from legal liability from the conditions in their plants because they were an “essential service”. Hogs or cattle…made little difference.
Who benefits from all of this? Three guesses and the first two do not count. Feedlots get paid whatever packers decide to pay them as price discovery has been derailed. Packers are concerned over price gouging investigations despite never having been punished for that yet. The Packers and Stockyards act has been run by eunuchs. The failure has been bi-partisan. Packers are currently doing something unusual. They are manipulating the cash cattle market “higher” than it would be if price discovery was allowed to work. The back log of fed cattle gaining weight would otherwise crush the cash market. You would have an 8-cent hog type cattle market. The consumer is now being asked to pay retail prices for beef that are exorbitant and will destroy demand. When I first forecast that steak would sell for $20 lb, did you think that I was exaggerating? Heck, I was too low. As of this writing, a choice Ribeye or NY Strip is $30 lb and Prime steak is $50 lb. How much steak do you think that the soon-to-be 20% unemployed are going buy? They cannot afford hamburger at $8.50 lb either. All of the value of a beef animal is being concentrated on the packer’s bottom line as they make more gross profit that what it costs them to buy the animal. Sure, it costs them more to run plants and give workers bonuses. Those extra costs do not put much of a dent in their profits.
They have so decimated their workforces with incompetent Covid-19 management that after refitting and reorganization they will restart at 50% of their pre-Covid-19 kill capacity under presidential orders. The entire beef packing industry ran at 66% of capacity last week. One out of 3 animals that should have been processed were still eating feed. They will then work to heal their workforce to improve that to 80%. Then only one of 5 animals will be bumped for lack of shackle space. Who gets bumped? Unlike the hog industry, beef packers own few cattle. Their acquisition is primarily done by contracts on formulas. It will vary from plant to plant and region to region by kill capacity availability. Feedlots that were still negotiating prices are a likely candidate for being the odd man out. Packers have sweetheart deals with large feedlots using formula prices. These feedlots will get precedence over the smaller ones. If a feedlot isn’t assured of shackle space then they will have to think twice about placing any more cattle-on-feed. Those feedlots without access to shackle space are destined to no longer be feedlots.
There is now a backlog of hundreds of thousands of fat cattle that are gaining weight getting heavier. Where do they find shackle space to get absorbed into the processing capacity? Do we just continue to overfeed animals and push the wave of cattle who are past their “best used by” freshness date back perpetually?
A group of commercial cattle feeders located mostly in the Plains states, The Beef Alliance, is proposing a “cattle set-aside” where the government pays feedlots $2.90 per head per day for placing cattle on a “maintenance diet” for 75 days. Enrollment would initially be 600k head. They would be prohibited from marketing those cattle for 75 days and new enrollment would be weekly, based on the weekly backlog. I suppose that they assume that things will be better in 75 days or as long as it takes. What actually happens is that packers know that there will be a glut of cattle available in 75 days. As I have noted, it will be difficult to recover kill capacity much beyond 80% of pre-Covid-19 levels so this backlog of fed cattle is not going to go away until cattle-on-feed are reduced to the kill capacity. Creating “reserves” such as this have not historically worked well. They tend to sustain a backlog of supply rather than eliminate it.
How about packers paying feedlots, funding the fed cattle set-a-side program rather than the government? It would cost them $1.74 million day initially (600k head X $2.90). That would give them the incentive to kill more cattle. At $1500 head net profit, last week they made $67.8 mln killing 452k head. It would cost them $12.18 mln to fund the cattle set-aside. That means they would still have made $55.62 mln. That is still good work if you can get it, leaving them plenty to spend on lawyers to fight the price-gouging investigation and to pay lobbyists to buy politicians to get them liability protection in Washington.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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