Epidemic Essentials: A Functioning Cattle Market

by Kayla Sargent

“Every cloud has a silver lining.”

“It’s a blessing in disguise.”

“The darkest hour is nearest dawn.”

There are multiple phrases that serve as reminders in the midst of a crisis that something better is on the other side.  It’s no question that America if facing a crisis as COVID-19 sweeps across the country.  Stocks feel it, the economy feels it, and sadly many Americans physically feel it.

With the panic that ensued, Americans rushed to the grocery store and wiped out the shelves, beef counters included.  However, when demand was high and beef prices rose, live cattle prices did the opposite.

In a letter to U.S.  Senators, Joe Goggins laid out the figures which showed from January to March 16, 2020 feeder cattle dropped 26 percent and fed cattle fell 15 percent.  Over the same time period, Choice cutout jumped up 7 percent.

“It is crystal clear to me that the producer, feeder, and consumer continue to get the boots put to them,” Goggins wrote.  “We have to make this situation more FAIR if rural America is going to survive.”

Then, the silver lining finally appeared.

“At a time when cattle producers are seeing record losses and bankruptcies, now exacerbated by the COVID-19, compared to the shelf price of meat at record highs – these margins fail to make sense,” four Senators wrote in a letter to the Department of Justice (DOJ).

On March 19, Senator Steve Daines (R-MT), Senator John Hoeven (R-ND), Senator Kevin Cramer (R-ND), and Senator M.  Michael Rounds (R-SD) penned a letter to U.S.  Attorney General William Barr and Assistant Attorney General Makan Delrahim which urged the DOJ to investigate the practices of the big four packers.

Specifically, the letter requested that the DOJ “investigate continued allegations of (‘meat packer’) price fixing within the cattle market and to examine the current structure of the beef meatpacking industry for compliance with U.S.  Antitrust law.”

The following day, Tyson Foods announced the week of March 23, it would add $5 per cwt.  to live cattle and $7.94 per cwt.  to dressed and grid cattle.

“As an American company supporting the agricultural backbone of this country, it is imperative during this national state of emergency, we not only support our customers, but our cattle supply partners as well by ensuring the long-term sustainability of the beef business,” Gary Michelson, Tyson Foods director of media relations, told Drovers.  “Without the pipeline of high-quality cattle, we would not be able to deliver on meeting the needs of our customers and consumers.  It is for these reasons Tyson Fresh Meats is providing a one-time premium effective for cattle harvested the week of March 23, in an effort to demonstrate our commitment and support of our valued cattle suppliers.  This is an unprecedented time and the intent of our response is to show our support in an effort to help our supply partners weather this extraordinary situation.”

A plant fire at a Tyson facility in Holcomb, Kansas last summer yielded similar market reactions, cattle prices fell while packer margins grew.  After the fire, the USDA Packers and Stockyards Division launched an investigation that is still underway today.

As the four Senators pointed out, “the continued effect of diverging profits and losses along the supply chain compared to high end-consumer prices further demonstrate this ongoing issue.”  The republican Senators suggested the resources of the DOJ Antitrust Division are necessary to “adequately investigate these allegations.”

“The Holcomb fire in August seems to have only empowered the packers to price gouge,” United States Cattlemen’s Association Director Emeritus Leo McDonnell said.

McDonnell explained that unlike the Packers and Stockyards Division, DOJ staff specializes in Antitrust Laws.  He added that the Packers and Stockyards Division “have suffered some real problems over the years dealing with market issues.”  McDonnell cited a 2002 U.S.  GAO audit that found the USDA models “do not incorporate market concentration, marketing agreements, and forward contracts because they were not designed to answer questions about these factors.”

A 2006 Inspector General investigation requested by then-Senator Tom Harkins (D-IA) reportedly found that “the Agriculture Department has pretended to investigate anticompetitive behavior among stockyards and meat companies since 1999, but in hundreds of cases hasn’t actually filed complaints,” according to an article in The Courier, written when the audit was released.

“America’s producers have faced an increasingly integrated and consolidated market, but in the past five years, USDA has made virtually no attempt to investigate or take action against unfair and anticompetitive market behavior,” Senator Harkin said in the 2006 article.

“The point is, USDA has a long history of using only those institutions who support these activities,” McDonnell said.  “We saw who they used during the trade investigations, COOL, market agreements, and early concentration problems, so to continue to rely on them to show a balanced picture would be a little foolish.”

McDonnell suggested that the agency tends to get “tied up” in internal politics but was quick note “there are a lot of good people there.”  Still, a DOJ investigation is needed for an adequate analysis.

“At the end of the day, this is something that needs to go to the Justice Department where they have the antitrust experience and analysts,” McDonnell said.  “And really that is their responsibility.”

McDonnell, a Columbus, Montana producer, has a long history and thorough understanding of continued consolidation in the beef industry.  He worked alongside Pat Goggins in an attempt to slow packer consolidation.  He said in 1980, the four largest packers accounted for 36 percent of total commercial slaughter.  By 1990, they had gained control of 72 percent and by 1999 up to 81 percent.

“Today, if you really think about it, we have three exerting the most influence giving us a few buyers and ten’s of thousands of sellers – a formula for a perfect storm and that’s where we are now,” McDonnell said.  “Along the way we have seen a huge erosion in the cash market as agreements between packers and feeders took place.  The question is, ‘are some of these agreements giving preference for reasons other than quality, and are they being used to manipulate markets and supply, or in any predatory form?’”

McDonnell said he had yet to see price disparity between retail beef prices and live cattle prices as drastic as recent figures have shown.

“Historically, we have had a fairly close relationship between beef prices and cattle prices and boxed beef prices and cattle prices,” McDonnell said.

He said demand for beef used to drive demand for cattle.  That was the initial model the Beef Checkoff was founded on, considering demand for beef would benefit cattle producers, according to McDonnell.

“But today, we have record boxed beef prices and weekly slaughter numbers we haven’t seen for years, but cattle prices are at levels we haven’t seen since 2011,” he said.

To McDonnell, the most recent figures Goggins shared with the Senators show “evident price gouging.”  He said Tyson compensating fed cattle purchases “only helps to show wrongdoing.”

Ultimately, breaking up the monopoly in the meatpacking industry could be a “possibility,” McDonnell said.  Another potential solution could be tying fed cattle prices to retail cutout values as Goggins’ letter suggested.  One thing is certain, the market needs oversight.

“In the 1980s many of these government folks have followed a line of thinking known as the Chicago School of Economics which basically thinks that free markets best allocates resources in an economy with minimal, or preferably no, government intervention.  Nice thought, but it ignores the realities of human behavior when it comes to corruption and greed.

“One thing about it, as the pork and poultry industry has shown, you are going to be regulated – just have to decide if you want government oversight or corporate oversight,” McDonnell concluded.


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