Industry opportunities and challenges
Bitterroot Stockgrowers, Hamilton, Mont.
Leo McDonnell of Columbus, Montana, was the Friday evening speaker at the Bitterroot Stockgrowers Ag Expo held January 13 – 14. Over 1,000 attended the 2 day event held in Hamilton, Mont.
“The last 18 months or so have seen the greatest loss in equity in the history of the cattle industry,” McDonnell began, “With nearly a $60 billion dollar loss to cattle producers.” In the meantime, retail prices have stayed high with only a minor reduction. “That’s good, as demand for beef is still very strong,” McDonnell noted. In fact, if you take the third quarter of 2016 with 6,468 billion pounds of US beef production, all retail beef prices $5.77 and fed steers at $113.26, and then compare it to the most recent historical quarter with same volume of US beef production, which was the second quarter of 2013 with 6,513 billion pounds, all retail $4.89 and fed steers at $124.95 you will see an increase of over $700 per head from cattle producers share to the wholesale/retail sector. Now remember, that’s just the increase in their share and while cattle producers own these cattle for over a year, our packer/retailer friends own them for just a couple of weeks. This spread grew even more in October and November.
So what happened? “I think what started it may simply have been what some call ‘a perfect storm’,” he said. “In late 2014 we saw the CME – with some industry group support – go from ‘Open Pit’ or ‘Open Cry’ as some will call it, to electronic trading, which allowed trade to occur much faster.”
“We also saw CME expand the limits with additional expanded limits on feeder contracts and live (fed) contracts. We basically made a casino out of the futures board for these high stake automated traders. Right now we are starting to see the board return to following some of the fundamentals that have driven our market’s historically, but the damage has been done,” McDonnell said.
“A couple things the U.S. Cattlemen’s Association (USCA) is pushing for are: 1) delay the trading time by 2 seconds; and 2) reduce the limits back to historical levels which would be more realistic to demand shifts. Outside of some kind of catastrophe, it’s not realistic to allow fed cattle prices to shift or change $7.50 over a 48 hour period. You need to understand that the futures led this market down and those who play in it led this market down.”
McDonnell said another thing that helped initiate this tumble was supplies, but it’s not what producers would typically think. “When our markets started to slip in 2015 much noise was made about record increases in carcass weights. You need to realize that even with these record increases, our slaughter numbers were down and 2015 recorded the lowest US beef production supplies in 20 years at 23.7 billion pounds. That’s why industry analysts had predicted fed cattle prices to average higher than 2014, a year that set record highs with U.S. beef production at only 24.2. What happened on a supply basis in 2015 was beef imports increased over 400 million pounds and exports dropped nearly 300 million pounds. This change in trade flows dropped nearly 750 million pounds of additional supplies on the US market which in turn increased beef supplies in the US market by 3 percent. In fact, if we look at poultry, pork, etc., we saw about 4 billion pounds more meat dropped on US market from shifts in trade flows in 2015.”
McDonnell continued, “I’m not going to get into the concentration and regionalization problems which we have in the packing and retail sectors that allow for this kind of market dysfunction. It’s well understood and I doubt there is any political backbone to take this on as we’ve seen in the past. But with the lack of competition, transparency becomes even more important.”
“Trade has, and will continue to have, with the liberalizations we’ve seen with regard to Brazil and Argentina, an even greater impact on our markets,” noted McDonnell. “We have had a failed trade policy in this industry based on the theory that we need to give access to gain access, to the point that the US with only 4 percent of the world population has the most open borders in the world and is the largest beef importing country. We have given access to Mexico, Canada, Australia, Columbia, Brazil, Argentina, and other major beef producing countries in world, but we have failed to gain access with the same enthusiasm,” he said. “It’s ridiculous to think that poor business deals will generate good ones or that increasing lean beef imports will add value to US cattle. Ground beef is 60 percent of our beef sales and to suggest because we may add a few pennies to lower valued 50/50 trim by increasing beef import supplies, and that in turn would raise the price of US cattle is not rational thinking. These kinds of claims defy the conventional wisdom, as market analysts attribute one single factor in higher prices: declining supply. It’s like stepping over a dollar to pick up a dime.”
McDonnell continued, “In the meantime, countries like Australia have negotiated bilateral trade agreements with Japan, the United States and are in that process with China. What’s interesting is the US is the largest importer of Chinese goods and second largest importer of Japanese goods. With China we still have do not have market access and Japan, whose economy is dependent on a trade access to US, still has a 38.5 percent tariff on US beef, while Australia enjoys a much lower level. We just need to get tougher at representing the hard working people in this country.”
“Where the US has negotiated bilateral agreements such as Singapore and South Korea we have seen much more favorable trade and beef export expansion. South Korea in 2016, when all reports are in, will become our fifth largest beef export market at $1 billion, and U.S. will surpass Australia in beef exports into South Korea.”
McDonnell said the U.S. cattle industry has a real opportunity with the new administration which professes to understand the leverage the US has in negotiating trade deals as well as the problems we’ve had in the past with the destructionist trade policies.
“With that in mind,” McDonnell stated, “USCA is pushing hard for 1) bilateral trade agreements with consuming countries, instead of these bloated and compromised multi-trade agreements like TPP; 2) country of origin labeling (COOL) to allow US cattle producers to utilize their checkoff to identify and promote their product as other countries are doing and 70 percent of cattle producers have supported their Checkoff dollars being used for; 3) more sensitive and timely trade safeguards for cattle and beef; 4) trade laws that recognize the perishable and supply sensitive of our market; 5) more current and product-specific trade data reports, which the steel industry gets, but this information is delayed by up to 3 months for cattle producers, and then it’s provided without much detail.”
McDonnell wrapped up his talk about the value of alternative marketing, the opportunities that exist out there and how businesses in other industries are seizing these opportunities is tremendous.
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