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Dittmer: Senate hearing elicits critical facts and logic

Free Market Reflections with Steve Dittmer

Dittmer: Senate hearing elicits critical facts and logic

A Senate hearing on your industry is always dangerous. It’s especially dangerous now for the U.S. cattle industry. Two Senate bills would mandate that each major packing plant procure 50 per cent of its cattle weekly by negotiated cash. The furor in the industry about such a drastic move, the remembered pandemic spectre of empty meat cases and rising food prices has put the spotlight on the industry — and politicians are always confident they can fix things.

But some good things resulted from the hearing — some data, some lucid and logical explanations on how we got here and the perspective of a bank involved with multiple industry sectors.

Glynn Tonsor, PhD, Kansas State agricultural economics professor, provided perspective, reminding folks that the beef supply chain is very complex, is constantly evolving and that not all the players accept all the evolutions.

He noted the change in leverage from cattle feeders to packers, beginning in 2016 when cattle inventories began to exceed operational processing capacity. Going forward, declining cattle numbers are expected and packing capacity increases.

Tonsor said better data and information, specific to each market channel — retail, food service and export channels — is needed. The Livestock Mandatory Reporting (LMR) program provides critical data for all sectors but as the industry evolves, some adjustments need consideration.

Alternative Marketing Agreements (AMA) are critical to satisfying the different needs of the three channels. It is well documented that they provide economic benefits to both packers and feeders but by definition, they reduce the volume of spot-market negotiations, he said.

Between 2014 and 2020, cattle prices, beef prices and industry margins varied greatly but the share of formula cattle went from 58 per cent to 65 per cent. Tonsor feels the research shows that those changes came from core differences in supply and demand. Without use of AMAs, he believes cattle prices would be lower, as production would not align as well with consumer demand.

He warned against wrecking the economic benefits of the industry’s evolution to improve beef quality and align production with consumer demand. Tonsor listed improvements to the LMR reports for consideration, including more detailed breakouts of some data, aggregating some data to increase reporting frequency, altering the regional designations to improve data quality, reviewing confidentiality procedures, refining the formula reporting to narrower categories vs. catch-all categories, more frequent meat yield data capture and considering zip code reporting vs. whole-state capture.

He concluded by reminding the committee that consumers are the only source of beef industry revenue.

Mark Gardiner is a fifth-generation purebred and commercial rancher in western Kansas. His family has been tracking the carcass performance of their cattle for many years. In the ’80s and ’90s, selling fed cattle by the pound — with little information transfer between segments — was not providing the information they needed to improve beef quality. An “antiquated” marketing system was his term.

He pointed out that value-based marketing has allowed smaller operators to earn premiums they could never have gotten with smaller cattle groups and being paid cash on the average.

He pointed out that cattle producers developed the concept of value-based marketing, to get paid for quality produced. Packers did not force feeders into AMAs. The industry voluntarily worked out the concept among cattle producers and packers to provide what the consumer demanded.

Gardiner said one boost to price discovery would be including base prices of formula, grid and AMA transactions in MLR reports.

Gardner showed a chart that demonstrated that between 2005 and 2020, the percentage of fed cattle grading Choice and Prime went from 56 per cent to 83 per cent.

“Please do not create regulations and legislation that have the unintended consequence of harming value-based marketing,” he said. It would undo many years of progress.

Dustin Aherin is vice-president, RaboResearch at Rabobank. The bank has involvement all through the beef production chain.

Aherin showed a graph, derived from government, industry and Rabobank data, that charted packer operating income/head from 2002 to 2020. From 2002 to 2016, there were six years of flat or small earnings of a few dollars per head and eight years of losses. Not until 2016 did the packers start making substantial margins, beginning in the $90 range then and in 2017, with larger margins the next three years. The major positive margins began in 2016 when processing capacity decreased.

He noted that most announced plans for new plant construction involve 500-1,500 head/day plants. If these smaller plants are going to compete, they will have to have product differentiation made possible by supply chain relationships and buyer relationships for more than just the high-value cuts.

Aherin noted that supply/capacity changes are slow moving but except for the pandemic, supplies and capacity would already be much better aligned, with packer margins more like 2018, at 18 per cent instead of 30 per cent. The backlog created in 2020 should disappear by quarter three, 2021.

About the author

Contributor

Steve Dittmer is the CEO of Agribusiness Freedom Foundation, a non-profit group promoting free market principles throughout the food chain. He can be reached at [email protected]

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