McDonnell: The Loss of One of America’s Last Great Arenas of Competition

Pat Goggins, who was one of the greatest advocates for ranchers and preserving a competitive market based on market fundamentals, always said it takes a little government to maintain a free market. I don’t think Pat was talking about a free market where you were free to do whatever you want to whomever you want. I’m pretty sure with his love for this country, this industry and his faith, he was talking about a market that was free of oppression and one that offered opportunity. Kind of what this country was founded on. With a system of checks and balances.

What we’ve seen happen in our cattle markets starting in 2015 and by end of 2016 with a $700 increase in Packer margins has nothing to do with a free market responding to fundamental demand indicators.

While we’ve seen one of the greatest periods for retail beef demand, we’ve also seen a cattle market that has collapsed against beef demand since 2015, due to the concentration in our packing industry and the character of many of these folks. The Holcomb plant fire in August has only seemed to empower the major packers. All evidence by the price gouging we’ve seen with the Coronavirus epidemic – and they are feeling empowered.

No doubt price gouging is taking place. Choice cuts went up to $44.50/cwt in just 3 days, live cattle prices fell in the last 3-4 weeks to $112.00/cwt and this week’s kill is exceeding 2019 levels. Choice Cutout has never rallied that much in just 3 days – it’s historical and at the time of this writing is at $250.51.

That’s the highest boxed beef since March 2015 when we had fat cattle at a little over $160.00 instead the $112, we see today. On a 1,400 pound steer that’s $700/head increase in packer margins. The demand for beef is great; in fact, historical, as reported this week, “Many beef items are sold out at the packer level 2-3 weeks…and some retailers are hiring more employees, even raising wages as grocer’s strive to restock.” Price gouging is often considered, “Price increases do not appear to be supported by increased costs.”

The COVID-19 epidemic has served to magnify a trend that started in late 2015 in cattle price suppression and by 2018 & 2019 we saw annual fed cattle prices below $120.00, the first time since 2011. In fact, 2019 annual averages were $5.82 for All Retail Beef. $222.86 for Choice Boxed Beef, but only $114.70 for the 5-area steer price. Basically the same price as 2011 when we had All Beef Retail at $4.44 and Choice Boxed Beef at $181.29. Also interesting to note, that beef packers margins were pretty good back in 2011 as noted on August 31, 2011 when the CME reported, “Beef packer margins have been generally good in 2011.”

The last time we had price trends for any period of time in All retail and boxed beef that close to these 2019 prices was in the first half of 2016, after the spread in feeder/packer margins had started expanding. For that period fed cattle averaged $131.25. Interesting during this period from 2011-2019, U.S. Beef Production had increased only by 3.4 percent over those 9 years while beef export demand expanded, the number of consumers increased, and U.S. consumer spending hit a record high in 2019.

This is not a fairness issue this is a corruption issue. With the concentration we have in the Beef Packing business, it’s important to note that collusion doesn’t even require these packers talking to each other or making side deals. Concentration at this level takes on a completely different set of collusions dynamics. That’s why a large group of us from across the U.S. are putting pressure on the Justice Department to put opportunity and greatness back into the rancher’s and independent feeders’ hands. When you look at the impact of production agriculture in our U.S. economy and all the downstream entities we impact and support entities behind them it’s huge.

I’m not going to confuse this issue with what’s going on in the retail sector or the CME, but along the way those discussions need to happen also. Don’t leave the cow and bull plants out, as since late 2015 I believe it’s even worse.