As reported in High Plains Journal. When it comes to cattle prices beef producers have voiced many opinions about the definition of fairness and concerns about consolidation in the marketplace.
It has also caught the attention of Congress where hearings have been conducted before House and Senate committees. Former President Donald Trump and current President Joe Biden instructed Cabinet members to look into what drives the system and whether farmers and ranchers have been unfairly harmed in light of major events in recent years.
Cyclical prices are always a hot topic at cafés and sale barns but were exacerbated when the Tyson plant fire occurred in Garden City, Kansas, in August 2019, followed by COVID-19 outbreak in 2020 that shut down the nation’s economy. It not only reduced capacity but also changed buying habits for consumers, who bought packaged meat instead of eating out.
Today, much of the discussion revolves around transparency, which is easy to say but hard to define. Cattle producers have worked hard to improve their genetics over the past 40 years and yet they feel the reward is elusive. Producers say the drive to produce lean Choice beef that consumers crave has been so successful that the market no longer provides a premium that it once did.
Jerry Nine, Woodward, Oklahoma, a lifetime cattleman who also owns the Woodward Livestock Auction, minces no words about what he believes is wrong with the industry.
“If we don’t do something about this packer control and the manipulation that is absolutely killing our product, we are sunk,” Nine said during a marketing panel discussion at High Plains Journal’s Cattle U and Trade Show in late July.
He believes 10% of people in the crowd will say problems will work their way out but he disagrees, adding “it will work you out.” Nine writes a weekly column for High Plains Journal.
“Twenty or 30 years ago you would figure what Choice beef was worth (by using the market’s yellow sheet) then you’d figure Select and if you thought your cattle would grade 70% Choice and you’d multiply the Choice times 70 and the Select times 30 and then take that times 63.5 or whatever you think your yield was and you would pretty well know what your fat cattle should bring,” he said.
Testifying before Congress
Scott Blubaugh, president of the Oklahoma Farmers Union and a fifth-generation farmer and rancher from north central Oklahoma, recently testified before a House Agriculture Committee hearing. He said four meatpackers control 85% of beef processing, 70% of pork processing and 54% of broiler chicken processing.
The end result, he believes, is downward pressure on the marketplace for livestock producers. He fears it will continue to drive more family farmers and ranchers off the countryside.
Consolidation is not new as the move to develop larger scale processing centers began more than 40 years ago. Some of the ownership structures today include global companies—JBS Foods, a wholly owned subsidiary of JBS S.A., of Brazil, which entered the U.S. market with the purchase of Swift and Company, and Smithfield Foods, a wholly owned subsidiary of WH Group of China in the pork industry.
Regulators must consider the need for robust competition in all links in the food chain, Blubaugh said in testifying before Congress. Stronger language needs to be added to boost the Packers and Stockyards Act and more reliable information from a mandatory pricing system and accurate labeling for consumers are also cornerstones. Congress, he says, must pass reforms for price discovery.
Glynn Tonsor, a professor in the Department of Agricultural Economics at Kansas State University, said price discovery is the process, not the actual price, where buyers and sellers arrive at a transaction. “The topic has long been misunderstood and unfortunately confounded with the price determination (or price level).”
“Transparency is very important because we know markets go up and they go down,” Blubaugh told Congress, adding that without transparency farmers and ranchers will continue to be squeezed at the expense of others in the supply chain.
The packing industry has transitioned into larger operations but packer concentration has changed little in the past decade, said Derrell Peel, an Extension livestock specialist with Oklahoma State University.
“The level of concentration that we have today, in general, we achieved about 30 years ago,” Peel said. “We have not seen any major changes since.”
The four largest beef packers are Tyson, JBS, Cargill and National Beef. About 10 years ago JBS picked up a couple of plants, most notably in Tolleson, Arizona, that today harvests some yearlings but before the plant processed cows, he said. What has changed over the 20 years is the excess packing capacity that existed since the 1980s has decreased slowly over time.
When the ConAgra plant in Garden City, Kansas, was destroyed by fire in 2000 it was not replaced. Tyson closed a processing plant in Emporia, Kansas, in 2008. In the South, Cargill Excel closed a plant in Plainview, Texas, in 2013. Those closures came as a result of cost-saving measures during over-capacity period in the packing industry, Peel said.
“There is ample evidence that gross margins have increased in recent years for packers and processors. What is not as firmly established is how net margins, which account for operating volumes and costs beyond livestock, purchase expenses, have changed,” Tonsor said. “Most of the packing and processing sector consolidations that has occurred predates the past decade or more—that is something not being clearly noted in most current discussion.”
The largest four firms having over 80% market share is not a new characteristic of the industry, he said.
Cyclical production on farm
Peel said economics are also driven by cow-calf numbers and feedlot placements and those sectors also have different margins and risks and those can be altered by such events as drought, he said.
During 2013 and 2014 cattle numbers were reduced, Peel said, “because of drought and the cow-calf capacity we were out of cattle” to provide the market. During that time feedlots were squeezed as were packers.
“Over time that chronic excess capacity has been whittled down and then when you lay that on top of the cyclical herd expansion we had from 2014 to 2019, which was the first expansion we had in 20 to 25 years since the early 1990s was the last time we had a full blown cyclical expansion.”
While it is ideal for all sectors to be profitable it is not always possible, Peel said. High corn prices subtract from the bottom line of cattle feeders, as an example.
“On balance, it is a complex issue, the timing of each sector is different,” he said. “There tends to be one segment in a better place while the other is worse off. Over time they tend to work out.”
Peel agrees that is important for Congress to weigh in and hold hearings and he notes the multiple “black swans” from the Tyson fire to COVID-19 are most known but JBS also experienced a cybersecurity attack in late May, and a fire in Grand Island shut down production at a major plant for a day.
When black swan events occur markets react quicker, too, he said.
Inflation on the rise
Tonsor and Peel both said all the issues and challenges come at a time when the inflation and higher food prices has caught the attention of the White House and Congress. The annual inflation has now gone up over 5% and that has caught the eyes of many who seek to find root causes.
National Economic Council Director Brian Deese linked double-digit increases at the grocery stores this past summer to the significant increases in beef, pork and poultry pricing. Deese references that in the protein industries anywhere from 55% to 85% of the market is controlled by the top four producers in those industries.
“When you see that level of consolidation and the increase in prices, it raises concern about pandemic profiteering—about companies that are driving price increases in a way that hurts consumers who are going to the grocery tore, and also isn’t benefiting the actual producers—the farmers and ranchers—that are growing the product,” Deese said.
Tyson Foods has come out strongly to disagree with assertions by the Biden administration that food inflation is driven by industry consolidation. Tyson stated in a news release the increase in the price of beef is due to unprecedented market conditions.
“Multiple, unprecedented market shocks, including a global pandemic and severe weather conditions, led to an unexpected and drastic supply in meat processors’ abilities to operate at full capacity. This led to an oversupply of live cattle and an undersupply of beef, while demand for beef products was at an all-time high. So, as a result, the price for cattle fell, while the price for beef rose.”
Now prices paid to cattle producers are rising, according to the company statement issued in September.
Tyson said, “It is inaccurate to suggest that consolidation in the meat processing industry is leading to higher prices for consumers. In fact, evidence of healthy competition can also be found by looking at historical outcomes. For example, we have seen a rise in availability and quality of beef, while the price has become more affordable over the past quarter century; data shows that while the concentration of the industry has remained relatively constant for close to 30 years, quality has significantly improved.”
Julia Ann Potts, president and CEO of the North American Meat Institute, recently testified before Congress that livestock suppliers and members of the Meat Institute benefit and depend on a fair, transparent and competitive market. The Meat Institute represents more than 350 meatpacking and processing companies, large and small, and account for about 95% of the U.S. output of meat and 70% of turkey production.
Potts said the assertion often made is concentration is ongoing and packers’ market power is becoming more and more concentrated.
“That is not the case,” she said. “The four firm packer concentration ratio for fed cattle slaughter has not changed appreciably in more than 25 years.”
According to the Agricultural Marketing Service’s Packers and Stockyards Division, the four firm concentration ratio was 82% in 1994 and today is it is 85%, Potts noted.
“Additionally, any potential merger or acquisition regulators believe threatens ‘too much market power’ is subject to review by the Justice Department or the Federal Trade Commission,” Potts said. In 2008, she said the DOJ blocked a merger of two of the “big four” fed cattle processors.
Potts noted that half of all beef cattle in the U.S. are in seven states and more than 70% of all fed cattle are in five states. “Economies of scale drive the capacity and production of a packing plant. That is especially true in areas with large numbers of fed cattle.”
Expansion is occurring
Earlier this year, Sustainable Beef, North Platte, Nebraska, announced plans to build a $200 million, 300,000-square-foot plant that will process 1,500 head of cattle a day beginning in early 2023 and employ 875 workers.
Nebraska rancher Rusty Kemp said a Rabobank study indicated that the industry could easily add more than 5,000 head of cattle capacity per day to restore balance in the system and help farmers and ranchers and the entire supply chain.
In Iowa, National Beef is adding capacity at its Tama plant with a total investment estimated at more than $100 million and will double the capacity of the plant to approximately 2,500 head per day. Also, Cattlemen’s Beef Heritage Company has announced plans to build a $325 million plant and process 1,500 head per day in late 2023 in Mills County, Iowa, which is near Council Bluffs.
In the final analysis, research has shown that producers who have a handle on their costs and cost of production put themselves in the best position to succeed, Peel said, because some cycles are controllable and others are not.
“Know your resources,” Peel said. “Whether you own or lease them, you control them. Your success depends on how you allocate your resources.”
Regardless if it is cow-calf operator, backgrounder or feedlot owner and manager, Tonsor said, cost control typically is more influential on profit than revenue maximization based on the findings based from many years of research at K-State.
With all of the market shocks of the past two years, Peel believes the market needs time to work. “I can sympathize with anger and frustration with everyone over the past two years,” Peel said. “A period of stability would be nice with no external pressures. It would be nice to have a break from all the turmoil.”