Cattle producers and lawmakers have been calling on the administration to expand its investigation of the wide disparity between rising beef prices and falling cattle prices amid the coronavirus pandemic.
Some producers also urge a restructuring of the meatpacking industry, breaking up the largest companies and requiring them to purchase more cattle through cash trade.
“An investigation into packers for whatever reason probably isn’t a bad idea,” said Derrell Peel, an extension livestock marketing specialist at Oklahoma State University.
Given four meatpackers account for more than 80% of the nation’s cattle slaughter and processing, it’s always good to have oversight, he said. That’s reason for worry about market power above and beyond supply and demand, he said.
“We are careful of that in this country,” he said.
However, they’ve been investigated by government and researched by economists for years, and no one’s found any undue influence on cattle prices, he said.
A large gap has emerged between wholesale beef prices and fed cattle prices since the coronavirus outbreak, but it’s the way the market works, he said.
“There’s nothing in these prices that surprise me as an economist,” he said.
Fed cattle prices are derived from the value above them on the supply chain. Coronavirus has caused a lot of extra costs in processing and shipping, which have driven fed cattle prices down and wholesale beef prices up, he said.
Processors are closed or running at reduced capacity, yet all their expenses remain. They are still paying employees — even if they’re not working — and paying bonuses to those who are. They’re also spending extra money making workers safer. Because of these added expenses, the cost per unit of beef product is much higher, he said.
Just looking at the margin between cattle prices and wholesale beef prices, people think processors are making “ungodly” profits — but those margins are basically meaningless right now, he said.
“They’re not making as much money as everybody else thinks they are,” he said.
The choice boxed beef price on Friday was $377.45 per hundredweight, the highest it’s ever been, but normally 80% of beef sold is priced four to six weeks earlier. Beef production last week was only 60% of normal, and most was already priced, he said.
There wasn’t much extra beef available that wasn’t forward priced and everybody was scrambling to get it, which bid up prices, he said.
“Negotiated boxed beef prices represented only a small amount of trade. The boxed beef revenue is not nearly as high as the boxed beef price would tell you,” he said.
He also cautions producers about wanting to break up the four big packers — Cargill, JBS, National Beef and Tyson. They got that way because of economics, and cost efficiencies allow them to pay more for cattle, he said.
Research has shown that their little bit of market power can push cattle prices down a little. But because of the cost efficiencies they have, they wind up paying more for cattle. Cattle prices would be lower if the big packers were dismantled, he said.
When it comes to cash sales, price discovery in negotiated trade is important. A lot of cattle are priced through alternative marketing agreements based on negotiated trade, which accounts for about 20% of cattle.
There is a concern that negotiated trade could get too thin, but there are better ways to increase it rather than mandating 30% to 50% be cash traded — as is being proposed by some, he said.
It’s time-consuming and costly to negotiate every pen of cattle or a large percentage of pens. An arbitrary mandate would increase costs and risk and, in turn, cost producers in cattle prices, he said.
One of the easiest ways to increase negotiated trade would be to use a market maker, an entity compensated by the industry as a whole for the hassle of conducting those trades, he said.