Tuesday, October 5, 2021

Soaring beef prices, packer profits, spur discontent

Farmers, consumers and politicians in the United States are in a lather over high retail beef prices and the huge profits four dominant beef-packing companies are garnering.

Farmers are calling for more competitors for their market-ready cattle and transparent pricing. Many politicians, including U.S. President Joe Biden, are inviting more investment in meat-packing plants by others than the dominant four.

But a number of agriculture economists caution that these good intentions may actually do more harm than good.

There is an 180-page book called “The U.S. Beef Supply Chain: Issues and Challenges,” that is the result of a collaboration among Texas A&M’s Agricultural and Food Policy Center, national experts and the U.S. Department of Agriculture, that says there is reasonable competition in the market and prices are relatively transparent.

Forcing more cattle through live auctions would not improve prices, but would increase costs and leave farmers with less money, they say.

Dr. Stephen R. Koontz, professor in the Department of Agricultural and Resource Economics at Colorado State University found that “the short-term impact for a policy most like that being considered is a $2.5 billion negative impact in the first year and a cumulative negative impact of $16 billion over 10 years, inflated to 2021 dollars. 

“This cost is leveled mainly on cattle producers,” said Koontz. “The 50/14 proposal would have these negative impacts and the 30/14 would have similar negative impacts albeit approximately halved.” 

“Among the cattle market economists consulted, there was general agreement that price discovery in fed cattle markets is still robust despite the fact that less than 30 per cent of the transactions are negotiated or cash.” 

John D. Anderson, Professor and Head of the Department of Agricultural Economics and Agribusiness at the University of Arkansas, Andrew M. McKenzie, Professor and Associate Director of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness at the University of Arkansas, and James L. Mitchell, Assistant Professor in the Department of Agricultural Economics and Agribusiness at the University of Arkansas and an Extension Livestock Economist with the University of Arkansas System Division of Agriculture wrote: 

“The reliance of formula prices on negotiated prices is reason enough to pay particular attention to the manner in which prices are established in the market. 

“Negotiated prices not only reveal information about supply and demand fundamentals in the fed cattle market; they also contribute substantially to formula prices that control two-thirds or more of fed cattle trades. 

“For both of these reasons, negotiated trades in the fed cattle market have some characteristics of a public good; therefore, market participants have a strong interest in ensuring that negotiated trades occur in sufficient quantity to fulfill this public good role.

“While some argue that imposing mandatory minimums on negotiated (or cash) transactions would improve price discovery in the fed cattle markets – accruing benefits to the cow/calf producer in the process – authors in this book argue it could have the opposite effect, potentially imposing huge costs that are passed down to cattle producers in the form of lower prices.” 

Two events pointed to a lack of beef-packing capacity – a fire that shut down a Tyson-owned plant and the COVID-19 pandemic. In both cases prices for market-ready cattle collapsed and retail beef prices soared.

But the beef cycle is on the cusp of reductions in the cow herd and the beef-packing industry is enticing new investments in packing plants, so capacity is likely to disappear as an issue.

In fact, there could be more packing capacity than cattle ready for slaughter which would prompt the owners of the largest, least-cost packing plants to aggressively bid for cattle, driving smaller competitors, including debt-financed entrants, out of business.