Reposted from Iowa Farmer Today
Bill Bullard | March 16, 2012 | Iowa Farmer Today
Cow/calf producers are receiving historically high prices for calves. Conversely, their customers — feedlot owners — are paying historically high prices for those calves.
Pundits attribute higher prices to increased exports. But, this doesn’t square with the fact prices first jumped to historical highs in 2003-2004, when beef exports fell to a 19-year low.
Sure, exports can improve cattle prices, but U.S. consumers are the major price-driver as they purchase approximately 90 percent of U.S.-produced beef.
It is elementary why cattle prices first reached historical highs in 2003-2004, even when exports fell near zero, and continue to reach new highs today. The United States does not produce enough beef to satisfy domestic consumption. For 40-plus years, the U.S. imported beef to overcome this shortfall — a shortfall that was the largest in history from 2004-2007.
CATTLE PRODUCERS should ask:
1) Why were cattle prices chronically depressed prior to 2003-2004, when exports were then at record highs, domestic beef consumption was then increasing, and consumers were then paying record prices for beef?
2) Why did cattle prices suddenly catapult to a new plateau in 2003-2004, even when exports declined, then stay at this higher plateau even when beef consumption subsided after 2007?
3) What changes occurred in our industry to ensure cattle prices maintain a competitive relationship with beef prices?
The answers are:
1) Cattle markets were dysfunctional prior to 2003-2004 while concentrated packers exercised market power that disrupted, supply/demand forces.
2) In 2003 Canadian imports were halted, preventing packers from accessing cattle they controlled in Canada, and the chronically dysfunctional marketplace had so decimated the cattle industry by that time the numbers of cattle producers and numbers of cattle were drastically reduced. This combination overpowered the packers’ market power, unleashing competitive market forces that drove prices higher.
3) The only change to mitigate the packers’ exercise of market power is the long- term decimation of our industry created the tightest cattle supply situation in 60 years — everything else is the same, including export volumes that are only marginally higher than a decade ago.
Our cattle herd would not have contracted so drastically if our markets were competitive.
Cattle prices should have maintained a closer relationship with rising beef prices since 1998, which would have enabled our industry to maintain a herd size in balance with rising beef consumption. But, they did not and the spread between cattle prices and beef prices grew wider than any time in history.
The reason cattle prices lost their close relationship with beef prices is because packers are working to vertically integrate the cattle industry, which consists of capturing the cattle supply chain by substituting profit-motivated competition with corporate control.
Vertical integration focuses where concentration occurs. In our industry, concentration occurs at the feedlot. By controlling feedlots, packers reduce risks and increase margins by eliminating the profit margins a competitive supply chain would otherwise allocate to cattle feeders.
When packers capture feedlots, marketing opportunities for cow/calf producers will evaporate and their prospects for staying in business will be limited to a production contract with a major packer.
This already happened in the hog industry and is why 9 of 10 hog producers in business in 1980 are gone today.
Some say it cannot happen with cattle because cows annually birth one calf and too much capital is needed to bring that calf to market.
But, packers already signaled their intent to vertically integrate the cattle industry.
The American Meat Institute argues it is “unfair” to stop packers from vertically integrating the cattle industry. The National Meat Association argues demands from meat buyers are pressuring packers to vertically integrate.
The capture of our feedlot sector is well under way. Since the United States began liquidating its cattle herd in 1996, small- and mid- sized feedlots have declined in number and in the numbers of cattle fed while large feedlots increased in number and in the numbers of cattle fed. Already, 35,000 independent feeders have exited the industry.
Packers like JBS and Cargill are fast replacing numerous independent feedlot owners that once created robust competition for feeder cattle.
Does anyone think competition is enhanced with 35,000 fewer feeders?
Does anyone think when packers control a majority of feedlots there will still be competition for fed cattle?
OUR CATTLE industry is poised for a corporate takeover by major packers whose sights are set on the feedlot sector. The unprecedented tight supply situation has only slowed them down.
And, because feedlots operate on margins, higher cattle prices increase their vulnerability. If packers again shun the shrinking cash market for weeks at a time, independent feeders could be squeezed beyond the breaking point and forced to exit.
Everyone in the cattle-supply chain will be harmed because the already blurred relationship between cattle prices and beef prices will become non-existent, and a handful of packers will begin dictating the price for calves, not a competitive marketplace. Cattle producers must support a ban on packer ownership of cattle and a ban on unpriced formula contracts as these are the tools packers use to disrupt competitive market forces and consolidate feedlots.
Bill Bullard is CEO of R-CALF USA and on the Board of CPA.