As the cattle industry continues to grapple with how the markets reacted after the coronavirus outbreak, a new report unveiled by the American Farm Bureau Federation provides an in-depth examination of the causes of and price implications resulting from extreme market volatility in the cattle industry. It also sets the stage to explore policy solutions.
The Cattle Market Working Group, comprised of the presidents of 10 state farm bureaus, spent more than two months investigating factors that led to market disruptions following a fire in August 2019 at the Tyson Foods beef packing plant in Holcomb, Kan., and the COVID-19 pandemic. They invited input and consultation from government and university experts, among others.
The report is designed to equip state and county Farm Bureau organizations with deep insight and policy considerations as Farm Bureau leaders debate policy recommendations for 2021.
“Our cattle producers suffered a one-two punch with the fallout from the Holcomb fire and the COVID-19 pandemic,” Farm Bureau president Zippy Duvall said. “The prices families were paying at the grocery store went up, but the prices paid to farmers dropped through the floor. That’s not fair to consumers or producers. We must work toward a more stable, resilient food supply chain that can better endure unforeseen challenges so we can keep America’s pantry stocked while ensuring farmers are paid a fair price for their products.”
The price movements and resulting margins after COVID-19 and the Holcomb plant fire led to consternation from many in the cattle industry over the potential for some in the packing industry to take advantage of the situation and participate in unfair or illegal behavior.
The Farm Bureau reports states that while the live-to-cutout spread typically provides a good measure of the overall health of packer margins, the uncertainty surrounding this situation makes that incredibly difficult to gauge. Also, processing plants’ new COVID-19 safety measures add a cost that is not included in the spread.
“There is no way to know the exact cost without getting a look at the processing companies’ internal information, but one can infer that the cost of protective gear, increased sick leave, increased bonuses and increased incentive pay are very high for these businesses. Additionally, while a plant may be profitable while operating at 90-100% capacity, that may not hold true at 50% capacity, even with record-breaking spreads,” the report notes.
The fixed costs associated with operating a plant come in many forms, including massive asset investment costs and large regulatory costs. The companies normally spread those costs over many animals when operating at or near full capacity, but when capacity is reduced significantly, the ability to operate profitably declines as they spread these fixed costs over fewer animals. “That being said, these levels reveal that processing margins were likely very healthy for many plants,” the report points out.
In its July report on the situation, the U.S. Department of Agriculture notes that at the core of many of these discussions is the desire for improved price discovery, reinvigorated competition and a more transparent relationship between the prices for cattle and their further-processed products.
Similar to findings presented by USDA, the Farm Bureau also explored some of the policy discussions on the table in an effort to develop its own policy moving forward. The National Cattlemen’s Beef Assn. additionally expects to have findings from its own working group completed by Oct. 1.
Mandatory minimum negotiated trade
The working group discussed “triggered” mandatory minimum pricing that is set on a region-by-region basis. Various and fluctuating levels would be determined regionally, including with input from state Farm Bureau members.
Negotiated trade is more common in certain states such as Nebraska, where the negotiated percentage has ranged from 30% to 60% in recent years. Other states typically have very little negotiated trade. In Texas and Oklahoma, for example, negotiated trade accounts for only 5-8% of cattle transactions. These discrepancies between regions contrast with the national picture, where negotiated trade hovers around 20-23%.
“A key point to remember when discussing the optimal level of negotiated transactions is that PRICE DISCOVERY is not the same as PRICE DETERMINATION,” the report notes. “While enhanced price discovery is a good thing, it does not necessarily mean it will result in higher prices (as many proponents of minimum thresholds contend).”
Any new policy should be mindful not to cause unintended negative consequences to cow/calf producers or to cause additional government interference in these markets, the Farm Bureau report notes.
Risk management and education
The working group suggested having the Farm Bureau work with the Chicago Mercantile Exchange (CME) to better address concerns from smaller producers. Existing risk management tools, such as Livestock Risk Protection insurance, could be adjusted to be more affordable for smaller producers.
“A resounding theme in almost every topic of the working group’s discussions was ‘risk management.’ Whether it be hedging cattle in the futures market or an insurance product, the lack of risk management tools used by smaller cattle and hog producers is concerning,” the report states.
Other areas of discussion surrounding risk management included, but were not limited to, using internet-based platforms for auctions to provide transparent market information, the boxed beef contract on the CME potentially providing additional risk management opportunities and making changes to risk management options both on CME and through other private providers to make them more accessible to smaller producers.
Small capacity meat packing
The working group discussed policy solutions that would allow smaller packing facilities to play a larger role in the food supply chain. Suggestions included creating incentives for smaller packing plants to become federally inspected.
The Farm Bureau said it supports several bills that encourage additional smaller capacity meat processing, such as the RAMP UP Act, the DIRECT Act and the Small Packer Overtime & Holiday Fee Relief for COVID-19 Act of 2020.
The Farm Bureau also said it supports strengthening the ability of the Grain Inspection, Packers & Stockyards Administration to enforce market rules. It believes in the need for robust enforcement through GIPSA and supports strengthening the agency’s ability to crack down on those who don’t play fairly in the market.
The report adds that the Farm Bureau “currently has strong GIPSA enforcement policy, as acknowledged by the working group. The working group recognizes the need to continue to advocate for these strong policy positions to make sure the markets are fair.”
Read the Cattle Market Working Group report.