SD’s Tupper urges competition in Senate Ag Hearing
Two cattle producers had the ear of the Senate Ag Committee for a couple of hours Wednesday, June 23, 2021.
Rancher and manager of South Dakota’s St. Onge Livestock, Justin Tupper testified, and so did Mark Gardiner of Gardiner Angus Ranch, Ashland, Kansas, and chairman of the board of directors of U.S. Premium Beef, a beef marketing company that is a part owner in National Beef, which is 51 percent owned by the Brazilian meat giant Marfrig.
Both men testified about cattle competition issues in an official Senate Ag Committee hearing in Washington, DC. Other witnesses included Dr. Glynn Tonsor of Kansas State University, Dr. Dustin Aherin, animal protein analyst with Rabobank, Chesterfield, Missouri and Dr.Mary K. Hendrickson, Associate Professor, Division of Applied Social Sciences, University of Missouri.
In his five minute opening statement, Tupper said the hearing was critical for the survival of the cattle industry. “There is a crisis across rural America, we are losing producers at an alarming rate, all the while watching big corporate feeders, packers with making record profits and the threat of vertical integration hanging over our heads,” he said.
“Producers in my state and across the country are enduring devastating drought conditions, this is just one of the many challenges cattle producers face. All the while managing the land, borrowing money to keep operations going, fighting shifts in weather and dealing with the rising inut costs in a fallen bottom line. Most ranchers who sell calves at weaning time are selling them for less than $1,000 per head…that’s less than a 1 percent return on investment. An incredible risky business. For those who raise and sell all the way to fat cattle, calving to finish, a finished animal is worth somewhere near $1600 per head today. Packers could buy that steer, process it, and sell it for beef alone, not counting by products for about $2,800 per head today for a gross margin profit of over 80 percent. We as cattle producers understand and want the packer to make money. That makes the whole system work but since 2015, corporate packers’ gross margin has ballooned from an average of $100 to $200 per head to well over $1,000 per head. Packers have enjoyed unbelievable profits, harvesting around 120,000 head per day while cattle producers go out of business and consumers pay double or even triple at the meat counter… Cattle producers… reinvest in their local community, buying and upgrading equipment, paying more for feeder cattle, reinvesting in the land through conservation practices. The corporate packer doesn’t reinvest in the industry or sometimes even in the country.” He explained that two of the big four packers who process 85 percent of cattle are Brazilian owned.
“The packers’ increased control of supply…has made it nearly impossible to have active price discovery. In my years as an auctioneer and operating St. Onge Livestock, I’ve learned that the most important participant in true price discovery is the second bidder. In most cases in the fat cattle trade today, we don’t have a second bidder, there are simply not enough market participants. In traditional market times it was assumed that when boxed beef prices rose, the packer would ramp up chain speed to increase profits, instead they are using limited chain speed and shackle space to make the same money or more harvesting less cattle. So producers see huge losses in equity while the packer reaps huge rewards despite having the least amount of risk and owning the product the least amount of time while exploiting the producers and ultimately the consumer. American cattle producers don’t want nor are we looking for a handout. Producers cannot be sustainable or generational without being profitable.”
“When there is an oligopoly with four packers controlling the industry, there are only 2 ways to level the playing field we can either work to eliminate the occurrence of anti competitive practices and market manipulation in the meat packing sector, or as we’ve seen done in the past, in other industries, we can break them up so that they cannot have as much influence in the market.
“These are critical times,” said Tupper.
Gardiner’s testimony followed Tupper’s.
“Today our topic is complicated; the cause of this issue is not. A processing plant fire, a pandemic and a ransom ware attack caused extraordinary disruption in processing, resulting in a dramatic drop of the processed beef supply and a bulging oversupply of live cattle. This caused an unprecedented drop in cattle prices while simultaneously leading to a record rise in beef prices. All driven by pure economic market principles.
“Today we have too many cattle and too little processing capacity. We have a volatile market place, created by outside unavoidable factors, not any one market player. We have observed similar lumber disruptions in lumber, automobiles and other goods. Now the solution to all of this is very complicated. Processors are adding capacity due to the demand for high quality beef. Adding this capacity will take time. History tells us we will reach a point when ample processing will compete for a limited supply of cattle. When this happens, the market place will shift and the producers will have more leverage. The question for us in the meantime becomes: how much damage will regulations do to the market place by artificially manipulating the pricing mechanisms?
“Experiences tell us the unintended consequences of these actions can create longer lasting havoc and even greater volatility to our industry. Let’s look at our industry history.
“From 1980 to 1995, we were the very picture of an industry in trouble. Consumer satisfaction was at an all time low. And we were losing market share at a rate that put us in peril of being an irrelevant protein. This loss of market share and dissatisfaction was rooted in the production sector.
“In other words, producers had to resolve our quality issues at the beginning of the supply chain. What caused the disconnect between our product and the consumer? Its very simple, all cattle were purchased on the average, there were no incentives, one price fit all. Progressive producers needed and wanted to price cattle on a value based system that paid for each animal based upon value, not average. Superior cattle have more value; inferior cattle have less value. These incentives allowed producers to respond to consumer demand signals.
“Today we have record beef demand. Producers designed and negotiated these grids with the processors. The information transfer between the industry sectors establishing pricing mechanisms that rewarded producers who delivered the beef the world desired. I want to stress the greatest benefit and the greatest added value has been achieved by the very smallest producers. They have reaped the largest dollar value per head and were given market access.
“The unintended consequences of regulated government mandates such as SB 3693 and 543 could potentially have a negative effect on the beef industry. I’m unaware of any data or research that indicates these proposed regulations will have a positive change on the price of cattle going forward.
“There is considerable discussion regarding cash trade. I look at this as a base price, no different than a commodity like wheat. I can call our local eleveator and get the base price of wheat. If I hit the targets of value with my wheat due to protein content or baking quality, I am paid for this additional value.
“Value based marketing operates on the same concept. We know the targets are value for the processor and the consumer. If we achieve these goals, we are compensated for producing superior beef. A possible price discovery that we could look at on the thinly traded cash market is to have all base prices of formula grid and alternative market arrangements (AMAs) become a part of mandatory price reporting. This base price needs to be inclusive. I remind you that this comes up for renewal on Sept. 30 of ‘21. Any changes that we make are better implemented by the industry versus government mandates,” said Gardiner.
Dr. Tonsor, Dr. Aherin and Dr. Hendrickson followed with their opening statements, and then the floor was opened for the Senators to ask questions. Many questions followed about how the beef industry can better serve consumers and avoid the disruptions in product availability that caused beef to be missing on grocery store shelves during the pandemic while lots of cattle across the country were overfed because cattle feeders were unable to obtain a bid on them.
Responses varied, with Dr. Tonsor, Dr. Aherin and Mr. Gardiner hesitant to endorse regulatory changes, although Gardiner did support the idea of updating the Livestock Mandatory Reporting (also known as mandatory price reporting) law to include a library of prices including AMAs and other forward contracts.
Tupper lent support to legislation that would require the big four packers to buy a percentage of cattle on the open or cash market. It was reported that currently about 25 percent of cattle are purchased this way. Senator Grassley of Iowa has sponsored a bill to require the big packers to purchase 50 percent of their weekly kill on the cash market and to take delivery of them within 14 days.
Several Senators indicated a need for legislative change that would provide more security to the food system including product availability for consumers as well as financial stability for producers.
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