In the midst of the recent Western Ag Reporter (WAR) #FairCattleMarkets campaign, the question and answer session at the Senate Ag Committee titled, “Perspectives on the Livestock and Poultry Sectors,” that WAR initially covered last week, spotlighted several issues and potential solutions to bring competition and transparency back to cattle markets.
When the cattle market plunged following the Tyson plant fire in Holcomb, Kansas, rural Senators reported hearing from numerous concerned constituents about the extreme market volatility. Those Senators met to discuss those concerns with representatives from National Cattlemen’s Beef Association (NCBA) and United States Cattlemen’s Association (USCA). Following are the Senators’ questions regarding market concerns and a summary of the responses from NCBA President Jennifer Houston and USCA representative Shane Eaton.
Chairman Pat Roberts (R-KS)
“Were your suggestions for MPR included in USDA’s report…?”
In the 2015 reauthorization of Mandatory Price Reporting (MPR), the USDA Agricultural Marketing Service (AMS) was directed to issue a report describing potential changes to consider in the 2020 reauthorization. To gather industry feedback USDA held ten public meetings at which 14 industry stakeholder groups were invited to provide feedback. Senator Roberts asked witnesses at the testimony if the potential solutions and concerns they brought forth in the hearing were considered in the report.
NCBA’s Houston said they took part in the discussions noting that, “it is such an important tool to U.S. beef producers, we feel comfortable.”
USCA’s Eaton, a rancher from eastern Montana, responded that he couldn’t speak to the current report, but the November 2015 CRS (Congressional Research Service) report did suggest looking into the impacts of imported cattle — an issue that he addressed in his testimony prior to the question and answer session.
Eaton said at that time, the National Farmers Union suggested the agency “look into imported cattle going into feedlots;” R-CALF USA wanted “more transparency in the reports” which Eaton said reflects on his proposal for a Non-native division in MPR; and “at the time NCBA had policy to allow AMS to look into the discount specifically for Mexican and Canadian cattle and make definition changes as needed.”
“There’s industry backing to transform MPR to accurately report the discounts that are in the trade today,” Eaton said.
Eaton proposed a solution by creating a “non-native” division in MPR.
Chairman Roberts also asked Houston how NCBA anticipates the results of the USDA study on the current five-area reporting regions will affect changes the organization may wish to pursue in MPR, as mentioned in her testimony.
“We want to see the facts that are discovered. We want this reauthorization as well as our policy at NCBA and any suggestions we offer for improvements to Mandatory Price Reporting to be based on facts that are found out in the market and also that it be something that benefits producers from all parts of the country,” Houston replied.
Senator Tina Smith (D-MN)
“How is market concentration affecting you…”
Senator Smith dived into the topic of concentration in the marketplace noting that the farmer’s share of the food dollar has declined from 37 cents a generation ago to about 15 cents today.
Dr. Jayson Lusk, Head of Purdue University Department of Agricultural Economics and Distinguished Professor, responded that there certainly has been more concentration at the packing level and it has increased over time but there is debate about the real impacts of this concentration.
“I would caution relying too much on farmer’s share of the retail dollar in part because a lot more happens after the farm today than in the past,” Dr. Lusk said. For example, high transportation costs and more marketing, he said.
He said one of the “driving reasons” for concentration among packing plants is to reach an economy of scale in order to lower minimum cost efficiencies, which in turn “helps consumers in the sense that it makes our meat more affordable than it would be otherwise.”
Lusk said there could be negative consequences of consolidation at the packing level as well but said he couldn’t make “blanket statements” as the impacts should be studied on a case by case basis. Ultimately, he said there are “pros and cons” as any “good economist” would say.
“I worry about the decline in power that producers have in this more concentrated industry,” Senator Smith added, turning to Eaton who mentioned in his oral testimony that without some fixes the structure of the beef industry is at stake.
Eaton told Senator Smith that as the beef industry stands today, it’s heading toward a shift to corporate contract growers. Only 15 – 20 percent of cattle are traded in the cash market every week.
“As a producer, I can tell you consolidation has produced lower prices due to lack of competition,” Eaton said. “When we sell fat cattle in Western Nebraska and Colorado we generally have one packer in the market even though there’s four packers there because they have captive supply; or these formula contracts that have no premium or discount associated with them and they’re able to use a loophole in the Packers and Stockyards Act because we haven’t defined those contracts clearly enough as our industries change. So, yeah, I can tell you that it has resulted in lower prices. As a feeder, I’m not going to go to a producer and bid them up any higher on their calves.”
Senator Deb Fischer (R-NE)
“Post-fire, will the markets rebound and who is being hurt…?”
“Things, as you know, are rough right now in the ag economy. Obviously, cattle prices are down the last six years, we have trade wars, we have rising input cost, we see extreme weather, the list goes on and on. To add to this, fed and feeder cattle prices are down and boxed beef prices are up and the packer margin is high,” Senator Fischer said. “Nobody’s going to argue with that, I would doubt.”
Dr. Lusk said in his oral testimony prior to questions that this market reaction can be expected as a result of the Holcomb, Kansas fire as the demand for cattle reduced with the reduction in packing capacity and cattle prices consequently suffered.
“But as the demand for beef has stayed the same, wholesale beef prices have increased,” Senator Fischer said.
“So using your modeling, when this facility comes back on line and packing capacity is going to be restored, prices should come back up, correct?” she questioned Dr. Lusk.
Dr. Lusk said the higher margin that packers are experiencing is “certainly incentive” for more packer capacity to come on line whether through additional slaughter days or conversion of plants from processing cows to steers and heifers.
“Those things cost extra money so those heightened margins are what will induce the industry eventually to try to add back some of that capacity,” Dr. Lusk said.
He said he couldn’t answer how long it will take for capacity to increase.
“Hopefully it is sooner rather than later,” Senator Fischer responded. “Because if those prices do not come up I think we can begin to explore some of the other factors that may be at play in this arena.”
She also noted a Farm Bureau analysis that showed significant increases in packer margins since the Tyson plant fire. Explaining that packer margins are the difference in the price paid for live cattle and the price received for wholesale beef, “I think it’s safe to say that right now, packers are doing alright, they’re doing okay,” she said. “And suppliers are getting hit and getting hit hard.”
“I’m looking at last week’s close: fed cattle, down; feeder cattle, down; wholesale prices, up,” Senator Fischer said. “So, I just want to be clear on this — who is being hurt right now and are you hearing from these folks?”
NCBA’s Houston said they are certainly hearing from concerned members and at this point “the feeders are getting hurt the most and it is trickling down, obviously, to the cow-calf producer too.” Houston noted that it is all part of the cycle, but “luckily a lot of the capacity was able to be taken up.”
“So we could be in an even worse situation, it’s certainly not a good one but there was a long time when packers didn’t have a lot of margin and other parts were making a lot more money,” Houston said. “So we hope things will stabilize pretty soon.”
USCA’s Eaton reminded the committee that for two days after the fire the futures declined limit down. He said he doubts that when the Tyson plant in Holcomb comes back on line the futures will climb for two days.
“Our members are very concerned because the packers created this additional margin,” Eaton said. “The cutout went out $22 the first three days after the fire before a fat calf was even purchased. Then we lowered the fat cattle price $7 and they maintained that margin going weeks ahead. There’s severe frustration that they’ve captured this margin and kept it, even as the prices for the cutout have come down recently. So, yeah our members are very worried about the way things turned out.”
Eaton noted that Senator Jon Tester (D-MT) requested the Chief Economist to look into the pricing mechanisms that play into this to ensure they are transparent as part of the investigation and invited Senator Fischer to support this.
Senator John Thune (R-SD)
“Is the investigation an adequate response from Congress…”
“This is a tough set of conditions for farming and ranching. In addition to difficult weather conditions you have low commodity and livestock prices and market uncertainty and this fire last month contributed greatly to that,” Senator Thune said. “I’ve heard from a lot of ranchers who are concerned about the integrity of the cattle markets following the fire. The fact that losing just one beef plant in the United States created so much volatility in the cattle marketplace, including decreased cattle prices to producers and increased boxed beef prices, to me is deeply concerning.”
Senator Thune specifically asked NCBA’s Houston and USCA’s Eaton if the USDA investigation into pricing margins after the fire was an adequate response to the volatility it spurred. Houston said she has “full faith” in Secretary Perdue and his oversight of the investigation.
“There’s a lot of emotion right now and a lot of people hurting. I really have faith this investigation will bring out the facts,” Houston said.
Eaton said, while awaiting the results of the investigation, USCA does have suggestions that may require further analysis. He said “lack of transparency negatively influenced the cash trade a few weeks after the fire.”
Again, Eaton said that relates to his group’s recommendation to add a “non-native” division to MPR to increase transparency. He also said clearly defining formula contracts and cash trades in the Packers and Stockyards Act could bring more transparency back to the market and increase cash trades. He said premiums and discounts not being fully disclosed has been an issue as well. With only 15- 20 percent of the market being represented by cash trades, in Texas and Oklahoma for example only 4,000 – 5,000 head out of 80,000 could be reflected in the cash trade.
“Just think about that as a business person, if you have such a small number that can be influenced that will, in turn, influence the rest of the cash trade or the formula base price, we need to have all the transparency we can get as producers. We need a referee,” Eaton said.
Senator Charles Grassley (R-IA)
“Are there specific changes to include in CFTC reauthorization…?”
Senator Grassley asked NCBA’s Houston if she thought there were specific changes that should be considered in reauthorization of the Commodity Futures Trading Commission (CFTC) that would ensure the agency has “the appropriate flexibility to fairly regulate transactions by everyone from small farmers to big operators.”
Houston responded that they had no specific changes in mind, but CFTC oversight is highly valued.
“I’ll accept that answer since you don’t have any suggestions, but I have heard from cattlemen in Iowa about the problems of all the trading that goes on in the last half hour of the day and some people having some advantages over other traders as well,” Senator Grassley said.
Houston said NCBA was part of a two-year working group that looked into issues with the CFTC and CME (Chicago Mercantile Exchange) Group and said while some problems were solved in that time, some issues are just “how trading goes on” especially on the futures markets. She said trading today “is just a very different world than it was when we had pit trading.” She said they found no wrongdoing during their study.
Senator John Hoeven (R-ND)
“How do we get more transparency and competition in the market and can your industry agree on a solution…?”
“All the time we hear about the issues of transparency and competition in the cattle industry. What can we do so there is competition and transparency in a way we feel the markets are working and the producer can have confidence in the markets?,” Senator Hoeven asked both Houston and Eaton.
“First off, there’s different parts of the market and different levels of transparency,” Houston responded.
Owning a livestock auction market, Houston said she is “certainly a proponent of transparency” and auction systems are the number one way to achieve transparency. She said there are a lot of regional differences in how the market works, noting that in the Southern Plains there are more formula cattle but “a lot of them are happy with it.”
She said in the working group with CFTC and CME, a fed cattle exchange was started but said it hasn’t taken off due to lack of participation. The idea was to sell more fed cattle at auction in order to set a larger cash price.
“It’s not a one-size-fits-all solution,” Houston said. “If I had a solution, I would have offered it a long time ago. Just to be honest, our industry is not 100 percent agreed on what the solutions are and how much transparency is needed.”
Senator Hoeven noted that her final point makes it difficult to make decisions regarding the cattle industry and it would “help us help you if you could get together in that regard.”
Eaton took that opportunity to again remind the committee that in the 2015 CRS, several industry groups were in agreement that issues with imported cattle not being disclosed in MPR should be discussed.
“That would bring a tremendous amount of transparency,” Eaton said.
In regard to competition he said there is plenty in the feeder cattle sector, but the live cattle sector lacks any competition due to vague definitions in the Packers and Stockyards Act.
“These formula contracts put together by packers that don’t account for premium or discounts but tie up a tremendous amount of inventory take the packers out of a competitive situation,” Eaton said.
“Those are a couple things we can do today to answer those questions,” Eaton said.
Senator Hoeven again asked if the industry had tried to come together on some of the solutions Eaton presented.
“There’s different interests in the industry and quite frankly, USCA represents those participants that are Schedule F taxpayers, people that aren’t stakeholders and have everything invested — compared to somebody that is in a W2 situation at a different end of the industry. That’s where we’ll have difficulty coming to these conclusions,” Eaton said.
In case you missed the summary of Houston’s and Eaton’s oral testimony prior to the question and answer session, look back to the September 16, 2019 issue of WAR or find it online at https://westernagreporter.com/articles/2019/straight-from-the-horses-mouth/. The entire hearing can be viewed at https://www.agriculture.senate.gov/hearings/perspectives-on-the-livestock-and-poultry-sectors.BACK