Jennings: Building Good Fence
Okay, I admit it. I have some old fences that need to be rebuilt on my ranch. You know the type, the ones that have wood posts being held up by rusty barb wire. The kind that you don’t dare to tighten the wires for fear that it will pull over the corner posts. It is not that I have been unaware of their condition or secretly hope that they will somehow fix themselves, I just haven’t got to them yet. They are always on the to-do list but other projects keep getting put in front of them. So every year I patch them up a little hoping they will hold cattle until I can get them rebuilt “next” year. That works really well on a wet year when there is lots of grass and not much pressure on the fence, not so good on a dry year. The dry years really make me wish I would have gotten around to rebuilding them.
Our cattle marketing model has been in the spotlight for the past 16 months. Particularly due to the fact that the packers have an ample supply of fat cattle to choose from and an incredible demand for retail beef creating large profit margins for them. This while the cattle producers are working with very narrow or below breakeven margins.
It appears there is enough money in the beef industry for all of the segments of the production chain to be profitable if it were more evenly distributed.
The issues plaguing the cattle market model are not new; we have had the same model for many years. There have been some changes that are worsening the current situation, decreased packer capacity being the most prominent. But the model of packers offering bids on market-ready cattle in the feedlot and contracting with feedlots for a steady supply of finished cattle has been around for several years. We essentially had this model in 2015, it is just that there was a smaller inventory of cattle and the packers had to be very competitive with their bids to fill their capacity resulting in good profit margins for producers. Where were the calls for reform then? Much like my old rusty fence not being an issue when I had plenty of grass, market reform became a low priory when the producers were all making money and it was the packers that were suffering. Their negative profit margins and a short supply of fat cattle in 2015 led to the closing of some processing facilities which is now contributing to the current price of fat cattle being lower relative to the box beef price. We should have been pushing for market model changes then instead of waiting until we were in trouble now, just like I should have been rebuilding my fence when I had plenty of grass instead of waiting until it is dry and my old fence no longer holds cattle.
All of the cattle industry groups agree that something needs to be done; the debate is what that something is. We have seen similar conditions in the fat cattle market many times, whenever we have a large supply of market-ready cattle the live cattle price goes down. The difference now is that (thanks to the Beef Check-Off team and economic stimulus payments) we have an extraordinary retail beef demand that could consume additional beef if we could get it processed. We need to replace the packing capacity that we lost in the last 5 years.
We also need more price discovery in the live cattle trade done through improved market transparency, more cattle included in the Livestock Mandatory Reporting (LMR), or negotiated trade mandates. We need to make these improvements in a fashion that doesn’t harm the positives of the market model that we currently have. We don’t want to lose the ability for Alternative Market Arrangements that pay premiums on high-quality cattle through price grids and the ability for feedlots to forward contracts with packers for financial stability in their operations.
The changes that are being called for are not going to happen overnight, much like I can’t just tear out my old fence all at once and then start rebuilding it, it needs to be done in sections. But there are some things I can do this year to patch up my fence to get me through until I get it all rebuilt, same with the cattle market model. We can reinstate the LMR which expires in September. When reinstating, we can address the confidentiality clause which limits the amount of fat cattle included in the current report, improving price discovery. Through legislation, we can require USDA to form and implement a contract library to create transparency of the contracts for formula fat cattle. Those should be improvements that are easier to achieve and we can get done now; you know, patching up the fence to get by this year.
The other, more significant changes will take longer to accomplish. It is quite possible the live cattle price will improve from a reaction of a smaller fat cattle supply before changes are implemented. We can’t stop pushing for reform just because the price improves; if we are serious about market model reform we need to advocate for it when we are profitable and not just when we are not. Remember, my fence needs to be replaced whether I have grass or not.
We also need to keep in mind that as fondly as we remember the past, market model reform is not going to return us to the days of multiple packers from regional plants offering up bids on fat cattle. The business climate of today is nothing like it was in the past and new challenges require new business models. Someday I will get my fence rebuilt, but it will be with high tensile electric wire instead of barbed wire. It will still be effective to hold cattle in, but it will be more labor and cost-efficient, and easier to maintain.
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Cash trade finished strong through Thursday with trade starting at $138 live and finishing with $142 alongside some $142.50 to a regional. The producer is finally hanging on to leverage over the packer, and not…