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Sen Vol 20#23-Real Supply & Demand Still Puzzles Folks

The Simple Overlay Over a Complex Production Chain

Source: Steve Dittmer | AFF Sentinel

Originally sent to subscribers 05/16/23

Edi. Note: We’ve been working on dissecting the huge SCOTUS decision on California’s Proposition 12, a complicated, 58-page, 5-4 decision, but the misdiagnosis of the beef market published Monday took precedence.

One would think the nation’s foremost business paper could get basic supply and demand correctly.

Alas, that is not the case.

Today’s Wall Street Journal has proven that while it can get some aspects of an economic case accurately, it’s no better than some of the inaccurate demagoguery from fringe groups inside and outside of the beef industry in understanding how the beef economy operates.

The Journal’s intentions were good, as they were trying to explain to the Biden administration why its contention that beef prices are mainly dictated by the number of major beef processors isn’t supported by the facts, (“The Big Meat Conspiracy Theory Unravels,” 05/15/23).

In 2022, the “Democrats alleged a corporate conspiracy,” the Journal article said. President Biden had claimed that the “rising meat prices and profits reflect” “`the market being distorted by a lack of competition’” and “`capitalism without competition isn’t capitalism; it’s exploitation.’”

That was accompanied by a vow to investigate the situation, under the guise of anti-trust law.

The Journal evidently wasn’t aware of the beef supply disruptions in the beef industry resulting from the Holcomb fire and then the pandemic problems that wrecked the processing throughput from plants in the early stages of the Covid pandemic. The interaction of supply, processing throughput -- not just capacity -- and boxed beef and retail prices was extremely unusual and likely hard for outsiders to understand. The phrase “black swan” event was not overstatement.

Beef throughput and supplies had already been pressured because of the processing capacity from the Holcomb Cargill plant being off line. Then the pandemic hit and packing industry throughput was significantly curtailed because of worker illness. Packers simply could not supply the volume of beef normally flowing into retail and foodservice channels. Retailers especially, given they were seeing a major spike in demand because so many restaurants were closed, bid up the prices of what beef supply they could get in order to reduce the specter of empty meat cases. Then they upped their orders because of empty case fears and packers were having to short orders because of throughput problems.

So boxed beef prices shot up as boxed beef buyers scrambled for the beef supply available. Fed cattle backed up, as cattle were ready but short-staffed packers couldn’t keep normal processing numbers.

On top of that, packers were taking worker temperatures; scrambling to install walk through infrared scanners; were putting Plexiglas barriers between workers and down the center of processing lines, providing masks and shields -- all of which took a further toll on productivity and throughput. That cost packers many millions of dollars. That’s not to mention the Covid fear on workforces inside plants.

So the Journal is correct that after Covid-induced shortages in 2021, the beef supply increased as packers “ramped up production” and “increased wages for employees,” compared to the Covid-short processing weeks.

Here’s where things go astray. The story said “producer costs for cattle and chicken have remained elevated.” The implication was that one of the reasons that Tyson, which had reported a loss for the first quarter of 2022, was pinched was that cattle producers had charged Tyson more for cattle. Yes, input prices cattle feeders have had to pay to feed cattle have increased substantially, thanks to Biden’s inflationary policies, especially for fossil fuels which permeate all food production. But cattle feeders are price takers, not price makers, something lost on the Journal and many outside observers.

Part of the problem for outsiders is they don’t understand how much the cattle and beef markets are a real, free market supply and demand market compared to most industries.

The Journal also claimed that consumer demand has declined as inflation ate into consumer purchasing power. Actually, consumer demand has held up remarkably well, considering the increased prices for beef in 2022 and 2023.

We understood the Journal’s discussion of the pandemic transfer payments increasing demand for beef in 2022, as well as contributing to labor shortages everywhere. But the next part puzzled us. “When supply exceeds demand, business margins increase as markets ration scarce goods via prices.”

Actually, the opposite is true. When demand exceeds supply, that’s when business margins increase and prices ration the available supply.

And there is no oversupply of beef. The supply of beef has been constrained by packing throughput for the last two years, especially. This year, declining numbers of fed cattle have tightened supply and driven prices higher. Tyson’s margin problem, as with any of the packers, has been a tight supply of fed cattle, increased wages for a scarcer labor supply and higher inputs of other necessary costs of doing business. Their only salvation has been higher boxed beef prices, the products they sell.

Higher prices the packers have paid for fed cattle are caused by competition among packers for a smaller supply, coupled with strong demand for beef. And boxed beef prices have been stronger than at any time since the pandemic-fueled high prices of a -- hopefully -- never to be repeated national pandemic. Even higher than that this spring.

We’re glad to see the Journal recognize that there is competition among the big packers, regardless of Biden’s opinions and those of Sen. Elizabeth Warren. And we certainly don’t want the government taking over the marketing of cattle and beef, as if they could do a better job than the marketplace.

The packers certainly made great money during the 2021-22 pandemic problems. But that was not because of “corporate abuse of power,” as Warren charged. The packers were actually forced to leave billions of dollars on the table because they could not process cattle fast enough for a marketplace hungry enough for beef that they bid up boxed beef prices far beyond anyone’s expectations. Empty meat cases inspired fear in both consumers and retailers, and retailers simply asked what they needed to pay to put meat in the cases.

Cattle feeders took the hit on lower prices for fed cattle because there were too many cattle for packers to process.

We don’t know where the Journal got their number of “meat prices” only up 0.3 percent over the last year. That is certainly not the case for fed cattle or retail beef.

Boxed beef prices actually topped the highs of the pandemic throughput struggles of 2021 in recent weeks of 2023. Prices in 2022 exceeded those of 2021 for nearly all of the year. And this year the industry is seeing record prices going into the high demand grilling season, increasing over nine percent in just the last few weeks. Cattle-Fax data shows May 10 boxed beef prices 20 percent higher than that date in 2022.

That is strong demand.

The Journal is correct that there is no “corporate conspiracy” by Big Meat. They are correct that Big Meat is not conspiring to lose margin and lose money, any more than many years in the past when they lost money, with the same number of big packers and the same relative market share split as has been true for decades.

But regardless of all complicating factors, supply and demand still rules. And now, the leverage of tighter supplies is with the cattle industry.

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