Market Woes or Market Whoa! Cattle industry continues to reel from market crash
In a real-life, make-it-or-break it game of “the limbo,” hundreds of thousands of cattle producers, and thousands of cattle feeders are wondering “how low can the market go?”
Meanwhile reports indicate other segments of the industry are reaping significant profits in processing and selling the beef produced from those cattlemens’ animals.
While USDA looks into possible infractions of the Packers and Stockyards Act, the talk in cattle country turns to concern about whether the probe will go deep enough.
“The government is supposed to be the policemen. There are laws but they’ve never really gone out and enforced them,” said Jim Dinklage, a Nebraska cattle feeder.
“If they really investigated I think they could find illegal activity,” he said. “There is probably nothing concrete on paper that shows they’re involved in wrongdoing, but if they can connect the dots, they can find it.”
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Dinklage believes the buying and pricing activity following the fire could have constituted collusion.
“They pay less for cattle because they supposedly don’t have the capacity to kill as many. Even without conversing, they can just decide ‘Let’s back off and see if we can buy cattle cheaper.’ They tell feeders ‘here’s all we’re going to pay because we had this fire and we can’t handle as many.’” But USDA reports showed that more cattle were killed the week following the fire, than the previous week. “They got all these cheap cattle bought, they might as well kill as many as they can,” he said.
Dinklage says he’s experienced retaliatory activity.
A packer representative once paid the custom feedlot for a pen of cattle that Dinklage himself owned. “There was a lien on the cattle. The check should have been in my name, the bank’s name and the feeder’s name.” If he’d been dealing with a dishonest feeder, Dinklage might have never seen the money he had coming to him. Fortunately this wasn’t the case. “I told the packer representative, ‘Don’t ever do that again.” They blackballed me (refused to bid on his cattle) after that.”
Packer profit margins following the August Tyson plant fire have increased, by all accounts.
The Sterling Beef Profit Tracker reported Sept. 6 that feedlots were losing $118.58 per head, while packers were making $430.73 per head. A year ago those same packers were taking in $259.86, according to the same report.
The cow/calf margin, on the Sterling marketing report shows $124.50 profit.
It can’t go without saying that the cow/calf producer assumes the lion’s share of risk and labor when it comes to beef production, next comes the feeder, and lastly the packer and retailer, said cattle producer and beef processor Mike Callicrate.
The Colorado-based small processor who markets his locally-grown beef to restaurants as well as end consumers, says the packing industry is taking exorbitant profits, but that the retailer is a big piece of the puzzle, too.
“I think we make a mistake trying to keep up with the packer profit separate from the retailer. They are partners.”
Callicate says the producer share of the beef dollar is currently 38.57 percent, down from 70 percent in 1970.
He breaks down the current pricing structure:
“The live market at $1.00/cwt. equals $1,350 live value, divided by the current $3,441.69 retail value, equals a producer share of 38.57 percent.
“A finished animal will yield 42 percent of the live weight into boneless retail cuts. A 1,350 pound live animal will yield 567 pounds of retail beef x $6.07 average retail for a total fresh retail beef value of $3,441.69
The retail value doesn’t include the packers drop credits, or the value of the offal, organs, etc. (1,350 lb. animal x $9.05/cwt. = $122.17), the retailers’ 12 percent added solution, or any value-added.
The packer and retailer are sharing $2,272.17 from the sale of a finished animal that cost $1,350. The investment turn is around two weeks.
According to the USDA, their commitment is to ensuring that market participants comply with applicable federal laws, including the Packers and Stockyards Act. The recently announced investigation of the fed cattle industry is meant to determine if there is any evidence of price manipulation, collusion, restrictions of competition, unfair practices or unfair advantages by any beef packer.
The investigation is expected to take up to 180 days to complete before results are made public as allowed by law.
Darrell Peel with Oklahoma State University said in a Drovers story that the market activity following the fire was overreaction in a sense, but that that it should straighten out soon.
“What should we expect going forward? Similar situations from the past may provide some indications. In December, 2000, a ConAgra beef packing plant in Garden City burned completely; never to reopen. Subsequent research confirmed initial reactions generally similar to the current situation. Most of the negative impacts on fed cattle prices subsided in three to six weeks after the event. Packing capacity relative to cattle supplies is somewhat tighter this time so the impacts may be slightly larger or longer-lived. Nevertheless, boxed beef and cattle markets will likely adjust relatively quickly in the coming weeks with final adjustments depending on the duration of the plant closure,” said Peel, in the Drovers story.
None of the four main packers has responded to a request for an interview.
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