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The cattle industry is not for sissies

The cattle industry is not for sissies

By David Kruse - Columnist | May 25, 2021

Part 1

Most ag producers are doing well today…with the exception of cattle producers.

As a former cattleman who promoted the industry, with a family still much involved in the industry and someone who identifies with cattle production, I will discuss what I believe is the most profound threat facing the cattle industry.

I find the gross divergence between being a beef producer and cattle producer that we are currently seeing as excruciatingly painful. The value of cattle has developed a very loose relationship to the value of beef today. Cattlemen have been brainwashed for years to think of themselves as beef producers. Then how come that beef is worth so much more than cattle? And that when beef prices rise on strong demand, that cattle prices weaken? The product of cattle becomes beef just like trees become lumber. Ironically lumber mills and beef packers are making all the money in these industries today capturing most of the margin while timber and cattle owners get less and less of the value of what the raw material brings on the market. NCBA and Beef magazine industry pundits helped with the illusion that cattle prices are discovered by the value of beef. There is little evidence of that in recent cattle and beef market correlation. The pundits, funded by industry corporate interests, colluded with packers to keep feedlots indentured as price discovery mechanisms for cattle diverged from beef price discovery. They had been led to believe that they have a vested interest in the quality of beef and that they would profit from producing the best beef in the world. They do have that vested interest but have been shut out of sharing the value of beef. Consumers pay more for beef with cattle producers being paid less for cattle with the margin being retained by the processors in the middle.

What started out to be a price transparency and price discovery problem for the industry has now metastasized into a significantly greater loss of ability by cattle producers to share in the value of beef resulting from overwhelming packer leverage in the cattle market. The issues of the absence of true price discovery and the loss of feedlot leverage in the cattle market are actually two different but related problems. We have been going after the price discovery issue for decades, addressing things like captive supply and the shrunken negotiated cash cattle market.

Packers have effectively gamed the system for decades, progressively gaining leverage in the price discovery system. They found that large feedlots would collaborate with packers accepting sweetheart deals that they could live with but that sacrificed feedlot industry market leverage overall. It was like the beef industry became occupied by an outside power with the help of a 5th column within the feedlot industry. Beef packers want to buy cash cattle as cheaply as they can while selling beef as high as they can. They have become remarkably successful in doing both. The result has been some astoundingly record packer margins while feedlots produce red closeouts and consumers find steak so exorbitantly priced, they now mark it up in 8-ounce portions instead of by the pound.

At one point in the worst throes of the Covid pandemic last year, beef packer margins equaled the entire value of a steer at the price they were paying for cattle relative to what they were selling the beef for. They kept the entire value of a steer in their margin. While packer margins have retreated from what could be described as grossly absurd, they are still extreme, consistently setting records over historical norms. While the packing sector had the edge on market leverage over the cash cattle market for most of my life it was only recently when the true extent of the advantage being wielded by the processing segment of the industry was revealed when the Tyson plant near Garden City, Kansas was temporarily taken off line for several months by a fire there. The loss of 5,000 head kill capacity tipped the industry leverage over to the packing segment as beef prices rose and cattle prices fell. That was just the warm-up for the Covid-19 pandemic industry melt-down which exacerbated the loss of packer kill capacity, backing up cattle to such a degree that frankly it has not been rebalanced yet today.

There are several factors contributing to the imbalance in fed cattle numbers and beef processing capacity frustrating us. Primary among them is that the cattle industry expanded and the beef processing industry did not. I fact the beef packing industry shuttered 9500 head of kill capacity between 2013-2015. There is an inelasticity to the cash cattle market where that small changes in supply become magnified in the market reaction. CattleFax calculated that for every 1% change in cattle market leverage, it results in $2.25 cwt or $33 head in lost value of cattle being shifted to packers. They think that leverage will improve by the end of this year. I hope so. The imbalance of numbers on-feed relative to packing capacity can be fixed by either reducing numbers of cattle on feed to the point where it flattens out the front-end supply or by expanding kill capacity. Extreme packer/processing margins create opportunity for those cattle producers who are able to connect from the ranch/feedlot directly to the consumer table. We are seeing more direct marketing by cattle producers to consumers today because that is here the money is. If the cattle producer can eliminate or become the middle-man by direct connection to the beef market, the financial reward can be enormous.

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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