Lack of cash cattle sales leads to less transparancy, more opportunity for wrongdoing, say some | TSLN.com

Lack of cash cattle sales leads to less transparancy, more opportunity for wrongdoing, say some

With fewer cattle being sold in a "bid and buy" situation, it becomes harder for the entire industry to know what their cattle are worth. Photo by Mandi Cottrell

While market analysts continue to report packer profit margins of at least $500 per head, and cattle feeder losses are estimated as high as $200 per head, the industry finger-pointing continues.

Why are feeder cattle and fed cattle prices so low? Is it a function of supply and demand? Some pundits say it is time for the packer to turn a big profit after the strong market cattleman enjoyed in 2014. Others say the market is broken, and while beef supply remains relatively strong, high beef sales are not equating to strong feeder calf and fed cattle prices due to interrupters like imported cattle and beef, along with vertical integration and consolidation at the processing and retail level. Ask your favorite neighborhood rancher about “trickle down economics” and you’re likely to get an earful.

A variety of beef and cattle industry representatives, who tend to disagree on market and trade issues, seem to come together on a single topic: the cash market for finished cattle is relatively small, resulting in challenges industry-wide.

While their thoughts on the why, the how and the what to do about it are as numerous as the list of ingredients on the back of a lab-made “protein patty,” the fact remains: fewer buyers are bidding for fewer cattle, creating a lack of competition.

“The small guys are at a disadvantage because they don’t feed enough cattle to provide the packer with the incentive to forward contract with them. They have to take whatever the price is. Jim Dinklage

Shane Eaton, rancher, cattle feeder and seedstock producer from Lindsay, Montana, testified at this week’s Senate Ag Committee hearing that 15-20 percent of finished cattle are sold on the open cash market, with the rest of them being marketed through formula agreements, most of which are based off the open cash market price as reported by USDA.

Colorado feeder Steve Gabel agrees that the cash market is narrow enough it probably does not reflect the actual value of the cattle being marketed.

The younger feeders are more prone to adjusting their business models to include forward contracts, while those who have been in the feeding business longer tend to lament the lack of cash trades, said Gabel, who owns Magnum Feedyard, along with his son.

Because smaller cattle feeders are known for producing an exceptional product, agreements shouldn’t be difficult for them to achieve, he said.

“The better quality of cattle, one would think the more money I could get, whether selling in the cash or on a contract, but if I’ve got 200 to sell vs. 2,000, that means I’ve got less leverage than a bigger feeder,” he says. Gabel said large feeders contract all types and classes of cattle under marketing agreements – not just the “high quality” cattle.

Nebraska cattle feeder Jim Dinklage says that most feeders desire contract agreements, and those who don’t have them are probably too small for the packers to mess with.

In a their lawsuit alleging packer collusion, among other things, R-CALF USA asserts that the thin cash market puts the entire industry in an extremely delicate situation. For one, it allows the four major packers, to significantly impact the value of all cattle. By “curtailing purchases of fed cattle,” for even a brief period of time, the four packers “precipitated an unprecedented collapse in fed cattle prices in 2015,” says R-CALF USA.

The complaint goes on to say,

“While Packing Defendants initially benefited from the rise in fed cattle prices

because wholesale beef prices rose in parallel, the meat margin fell to a low of

approximately $50 in the months leading up to 2015, sending the packers’ margins into the

red.

“In response, Packing Defendants commenced and/or accelerated their

conspiracy to depress and stabilize the price of fed cattle purchased in the United States. The core of their collusion was an agreement to reduce and then manage their respective slaughter volumes: a classic abuse of monopsony, or unfair buying power. Packing

Defendants implemented their conspiracy, by, among other conduct, agreeing to: (1) periodically restrain or reduce slaughter numbers so as to reduce demand for fed cattle; (2) curtail their purchases of cash cattle during these periods; (3) coordinate their procurement practices with respect to the cash cattle they did in fact purchase; (4) import foreign cattle to depress demand for cheaper domestic cattle; and (5) close or idle slaughter plants and refrain from expanding their remaining slaughtering capacity.”

“Most are large feeders and they contract their cattle. The smaller feeders don’t have the volume and the packer doesn’t see the value in making agreements with those who are only selling a few hundred head per year.”

Dinklage says that the more small feeders who go out of business, the fewer number of cattle being bid on in a competitive market situation.

“The small guys are at a disadvantage because they don’t feed enough cattle to provide the packer with the incentive to forward contract with them. They have to take whatever the price is,” he said.

Another Senate Ag Committee testifier mentioned the thinning of the cash market.

“There are significant benefits to formula contracts and more producers are voluntarily choosing this method of marketing over the cash market, but questions remain about the volume of transactions needed in the cash market to facilitate price discovery,” said Jayson Lusk in his written testimony.

Incentives obviously exist to entice both feeders as well as packers to enter into forward contracts, says the Purdue University Department of Ag Economics head.

Lusk believes that, while many in the industry asked for mandatory price reporting, and celebrated it’s 1999 enactment as a step toward improved transparency in the market, the rule may have actually encouraged more formula contracting by creating more confidence in the cash market prices being reported. So has the “thinning” of the cash market created a more challenging environment for a feeder to make money? Without the use of risk protection methods, Gabel says “yes.”

In his feeding operation, his income is tied more directly to his ability to manage his risk and properly use and dispose of futures contracts in a timely manner, than the actual cash price on any given day, he said

The reported $200 losses in the feeding sector are “very real,” particularly for those buying and selling in the cash market, Gabel says.

In order for cattle feeders to better establish value and profit for their cattle, the feeding industry as a whole may need to look at a pricing method that connects the cutout or actual beef value, to the value of the live animal, said Gabel.

Dinklage believes that the re-implementation of mandatory Country of Origin Labeling would help encourage more cattle feeders to sell on the cash market, because it would help provide more profit opportunities for those who are feeding strictly domestic born and raised cattle.

The larger feeders may still choose to contract their cattle, but COOL would give smaller feeders (some of whom are not currently feeding cattle because of the difficult financial situation) an incentive to get back in the game, he believes.