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Meat-ing The Challenge: Part 2

No Easy Solution for Industry Marketing Methods Improvement

Edi. Note - This column was written before the news that JBS in Greeley would be shut down for several days for deep cleaning and testing. All 3,000 of the employees would be tested before going back to work. Estimates range from 35-50 employees who had tested positive for the coronavirus by the weekend. The plant hopes to be up and running sometime between Tuesday and Thursday. Economics Professor Stephen Koontz referenced such a possibility in Part I.

The previous column mentioned some of the things the industry was doing successfully to keep the beef supply chain up and running. The disruptions, however, have affected balances in that supply chain and the markets.

Of course, the futures market is just another commodity market to investors and speculators. All stocks and bonds and futures markets fell out of bed. Suddenly, no one wanted to own anything. Banks have been awash in cash because so many investments have been liquidated and the proceeds are put into savings and Treasuries. Just as Victor Davis Hanson said people have found about the essentials of life, the futures markets found that investors with optimism and liquidity are essential. Cattlemen who don’t like other investors playing in their futures market found out what the futures are like with no speculators, without longs in the mix.

Koontz reiterated that while the cattle markets suffered, they were hardly unique. Lots of assets and equities were being sold. Wheat was one of the few commodities with strength.

With all the upheaval in the markets, some folks have forgotten how lucky, again, it is that they are in the food business. People have to eat. So many businesses are totally shut down, with no revenue, no product flow, no jobs for their people. Keeping the beef flowing from the ranch, to the feedlot, to harvest to grocery has been a herculean task but has been happening better than might be expected, under such conditions.

In this instant reaction age, people expect markets to react instantly. In uncertain times like this, there might not be an overnight recovery. It has taken some time to rebalance supply and demand. Boxed beef prices dropped substantially over time, futures have been coming back in limit steps, after going down in the same fashion, live prices are off some from what they were before the virus started disrupting everything. But live prices jumped back $10 in a week. The fact that live prices ranged for a while $20 above the futures showed how empty the futures market was of willing buyers of long positions.

The temporary disconnect between boxed beef prices, futures, and live cattle prices caused by the virus scare has focused attention on price discovery and cash markets.

Koontz cautioned that with this chaos in markets and national eating disruptions, the underlying fundamentals in the market are not going to function normally. Too much economic uncertainty and atypical trade patterns dominate right now.

While all of the industry’s regions show some strain from a cash market that doesn’t have the “depth” that it should, the data shows the Texas-Oklahoma-New Mexico region is suffering the most, Koontz said. But there are many reasons the formula model works well for many. For cattle feeders who need to sell cattle every week, it is a significant cost saving. It works for big packing plants that need to buy cattle every week. But they both want a viable, weekly cash market price to work off.

“It saves the formula guys a fair bit of money, which I can guarantee you are being passed on, in part, to the cow/calf producer,” Koontz said. “If the formula pays better for the feeder, he will pay more for calves he knows will work. They want to replicate that cycle.” Forward contracts do a lot of the same things.

Few if any economists besides Koontz have delved more deeply into the Mandatory Price Reporting data plus conducted extensive interviews with feeders and packers.

There is evidence that formulas, forward contracts, and other alternative marketing agreements have improved beef demand, as well as improved beef products, he said. But because they work so well for several segments of the industry, we have lost some of the depth, the robustness of price discovery.

Just the major increase in industry carcasses grading Choice, and even more so, Prime, is one measure of those incentives working. That incentive works its way back through the chain to cow/calf operators and seed stock producers.

The industry is going to have to figure out how to trade enough cash cattle to make price discovery work, he said. How? That’s very difficult. Feeders might have to realize that it might not be in their best interest every time but it is in the industry’s best interest to do something different sometimes. It does look to Koontz as if some progress is being made.

The industry needs to be careful to do things based on objective data, Koontz cautioned. There is not a simple answer. The incentives for formulas are there and they do boost calf prices in turn. The industry has to figure out just what having a good cash market is worth and whether we want to pay that price.

But legislation, as some are thinking about, would limit our flexibility to change, to keep our entrepreneurial spirit and drive to manage costs and improve quality and our ability to make a good business work, Koontz said. He is worried about trying to legislate a solution. There are no simple ways and no fast solutions.

No matter what concerns cattlemen might have about the shortcomings of the level of cash markets, there still is an indirect linkage between how much supply packers can sell at a given time. Consumers, through retail and foodservice, vote with their dollars and patronage and that reflects in what packers will pay for cattle through any buying method. It is a muffled price signal to the cash market but cash is not totally disconnected from the consumer marketplace, the ultimate deciding factor.

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