Words from Brad Kooima
Editor’s note: This week’s commentary comes from Scott Varilek’s co-worker.
Covid-19 has affected us all and impacted all segments of the economy differently. I want to take a little bit of time to explain what the Coronavirus outbreak has meant to livestock producers. For this article I focused on cattle but hog producers are having similar issues.
To give a little bit of a background on how cattle are procured, most cattle in our area are negotiated sales between about seven different packers and the individual feeder. Negotiated cattle prices are based on quality of the animals, whether they are the optimum size for slaughter, and even what color and breed the cattle are (i.e. Black Angus.) In the south (particularly in Kansas and Texas) the vast majority of the cattle are not negotiated, but rather are formula priced. This means the cattle are basically turned in to the packer and the net price received is base value plus a premium. The premium is based on the large feedlots’ ability to deliver a large quantity of cattle not the quality of the animals themselves. Nationally between 80-85% of the cattle are priced via formula.
So, what does this mean in the era of Covid-19? The ability to harvest cattle is being greatly reduced because of the slaughter plants’ inability to maintain adequate staff. The industry is only harvesting 75-80% of their capacity because of the slaughter slow down. What is happening to the feeders in the north who are negotiating their cattle? They are unable to get their animals harvested because the packers are using up their formula cattle.
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Back in late January, at the beginning of the Covid situation, cash cattle were worth approximately $120.00 per hundred to the producer and after harvest and fabrication packers were selling wholesale beef at about $210.00. As of this writing, cash cattle are worth about $100.00 to the producer and wholesale beef prices are $373.00. Obviously the prices paid to the producer have collapsed at the same time the prices received by the packer have skyrocketed. The producer is getting less, the consumer is paying more, and the packer is reaping the financial benefit of this crisis.
In my opinion, the root of this problem is over the years we have experienced a sharp decline in the amount of negotiated cattle. The lack of negotiated cash trade has put producers in the north in a tight spot for some time, but the Covid crisis has pushed many over the edge and has pulled more of these issues out into the open. Currently, there is a rising tide of sentiment that something must be done to help rectify this. Unfortunately, it will likely have to be mandated by legislation. In this area of the world, producers are vital to both the food supply chain and our local economy. If you are concerned, join and become an active member of a trade association like the Iowa Cattlemans, the NCBA, or whatever group you think best voices your view. Even if you are not a producer you can still engage your congressman and express to them that this matter needs their attention. Because at the end of the day, it will not only impact the livestock producers but every business and person in this area.
Brad Kooima, President
Kooima Kooima Varilek Trading, Inc.
The risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.
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