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Dittmer: U.S. beef business and politics

Dittmer: U.S. beef business and politics

Economics and politics in the States this spring has boiled down to bottlenecks, tax and spending bills and meat processing struggles.  

Most of the grocery stores seem to be maintaining meat supplies, even as packers struggle to get close to rated capacity harvest. With currentness slipping in feedyards, the last thing the industry needed was a major plant down but the ransomware attack on JBS lopped a couple of days off a week’s work.  

Not only has domestic beef demand stayed strong in the face of higher prices, exports are also booming, accounting for nearly a quarter of boxed beef shipments in some weeks. That’s in spite of refrigerated container shortages, port delays and shipping problems.  

Many industries are struggling with supply problems, not just food.  

Construction is one, and from the lumber standpoint, that industry is having problems similar to the beef industry.  Timber owners are not getting good enough prices for logs plus the cost of logging and shipping but finished lumber prices have tripled. The lack of enough sawmills and workers are the bottlenecks. Some timber firms are taking payments to not cut trees for carbon tax credits rather than harvest timber too cheaply.  

But the pressure on lumber prices and supply problems for homebuilders is creating an incentive for the U.S. and Canadian politicians to again discuss the tariffs on Canadian softwood lumber, perhaps helping that trade.  

Feedyards are having to deal with grain price increases and supply disruptions. Rainfall has come in some areas of the West and the Cornbelt. While drought is still prevalent in many areas, rain has helped prevent things from getting any worse except in California and parts of the Northwest.  

In Washington D.C., the Democrats, Republicans and White House, having spent nearly $2 trillion on the COVID-relief bill, are now fighting over another $2.9 trillion for “infrastructure.” Sensing that perhaps they can’t just run over the opposition for another gargantuan pile of cash, the White House signaled a willingness to cut some things out and not raise taxes as much as they want to pay for their extravagant want list. The Republicans have dug in, trying to limit the definition of infrastructure to roads, bridges, ports and airports. They are also opposing new taxes or rolling back the Trump tax cuts.  

The two sides will likely “compromise” on around a trillion but agreement on how to pay for the bill could be problematic.  

All the packer throughput problems are playing out while NCBA is trying to deal with the negotiated cash marketing problems. Having had a first quarter that tripped a major trigger, only one more such quarter this year will put NCBA into a corner, making the association pursue legislative or regulatory efforts to increase cash transactions. The association is pursuing a timely renewal of the Mandatory Price Reporting legislation, including more pricing information.  Reporting the cash base price on Alternative Marketing Agreements and contracts would significantly improve pricing information.  

Much discussion is focused on packing capacity but that is not a near-term solution nor is it clear more capacity could be staffed and operated if it appeared tomorrow. But a 5,000-hd./day plant would cost an estimated half-billion at today’s prices and that’s a fraught call, with cattle numbers trending down in coming years. Several smaller plants are planned or under construction but not operational.  

NCBA has been negotiating with the major packers to work out a process for reporting data on negotiated sales. Nearly all of the majors have been close to a deal and, hopefully, all will be in camp soon.  

Packers have been buying thousands of cattle on Mondays, Tuesdays and Wednesdays some weeks, indicating disruptions in the normal flow.  

As experts evaluate the data, there is no doubt that ample cattle supplies, packer-rated capacity lower than the available supply plus labour shortages crimping packer throughput have put the packers in the catbird seat. Recent Saturday harvest numbers necessary to keep them from falling further behind were over 90,000 head, a much higher number than normal.  

There may be some who doubt that the packers are struggling to boost harvest, while they can enjoy massive profit margins as things stand. Packer margins have climbed to over $800/head some weeks.  

However, we know meat processors don’t usually leave dollars on the table if there is demand for meat and supply to be had.  

Estimates vary about how far under the rated capacity the packers are operating. Some say 10 per cent, others 15 per cent. On a 600,000/wk. harvest, ten per cent would be 60,000 head, 15 per cent would be 90,000. Taking even a $600/hd. margin, under what the packers were getting this spring, that would mean packers, as a group, would be leaving $35 million to $54 million on the table every week, if purposely cutting harvest.  

That seems unlikely. The question is, will they share some of that booty with feeders any time soon. 

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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