IT’S ALL ABOUT THE MONEY.
Meat Market: Why Beef Prices are High and Cowboys Feel Low
Here’s a headline that doesn’t make sense: You’re paying a lot for beef but cattle ranchers are going broke.
“I actually took a full-time ranching job now just to make ends meet,” says Nebraska cattle rancher Eric Calkins. He's been forced to take that extra job, managing someone else's cattle, because he can't make enough money raising his own. “Things are so tight.”
Fact: Retail prices for beef remain higher than average, though down from last year’s panic buying. See this chart from the Bureau of Labor Statistics.
Fact: As you’ve been stocking up on steaks, cattle ranchers are losing money. “We generally need around $1,000 a calf to break even,” says rancher Brett Crosby, who runs about a thousand head of cattle in Wyoming and Montana. ”Calves were bringing in around $850 this last fall and spring.”
Fact: Six years ago, the USDA says over 50% of the wholesale price of beef went to the farmer. That is now down to 38%.
Fact: Covid hit the middleman hard — the meatpacking plant. This is where cows are slaughtered and processed for the consumer market. At least 25% of beef slaughter capacity was lost last spring due to Covid outbreaks.
Fact: Even with all that, meatpackers are having a great year.
There are four large meatpacking companies which control an estimated 80% of all beef processing in the United States — JBS, Tyson, Cargill and Marfrig. Three of those four are publicly traded, and based on their earnings reports, beef is booming.
At Tyson, sales grew in the second quarter “as demand for our beef products remained strong” and operating margins more than tripled in a year to 11%.
Sales at JBS’s USA beef segment jumped 32% in a year and margins before taxes and depreciation (EBITDA) nearly doubled to 9%.
Marfrig reported its most profitable first quarter ever in North America.
How can this be? How can cattle ranchers be suffering while packing plants are reporting record profits?
“At the moment we have more cattle than we have the processing capacity to get through,” says Brett Crosby.
It’s clear the packing plants are the chokepoint in the supply system.
The reasons why are debatable.
Meatpackers say that on top of too many animals and too little plant capacity, they still don’t have enough labor because of the pandemic. There was also a cyber attack last month which temporarily took out 20% of the daily beef slaughter, further backing up the system, not to mention the lingering disruption caused by a fire at one of the nation's largest meatpacking plants in 2019.
“The beef market is dynamic, with recent challenges due to labor shortages and the Covid pandemic rather than problems with market structure,” says Julie Anna Potts, CEO of the Meat Institute, the industry trade group.
To hear ranchers tell it, meatpacking plants have too much control over pricing. They pay livestock producers too little for cattle, and then the packers turn around and make $1,000 off every animal, at least five times the norm (that $1,000 doesn’t take into account the cost of processing).
Congress is taking note.
“There is clearly a need for greater transparency and competition in the marketplace,” said Sen. Debbie Stabenow (D-MI), chairwoman of the Senate Committee on Agriculture, Nutrition, & Forestry, which held a hearing on the matter last week.
None of it means cheaper burgers for you. Until maybe next year.
WE LOVE MEAT!
If Covid taught us anything, it’s that America is not going vegan.
We’ve been beefing up on meat during the pandemic, even with restaurants closed. Meat sales reached record highs in 2020, increasing by 19.2%. (You can thank me for a lot of that. Free plug: 801 Chophouse in Des Moines may be the best steakhouse in America.)
It should be a great time to be a cattle rancher, right? Wrong.
First, let me preface by saying that in all my years covering agriculture, there is one thing truer than the sun rising in the east: farmers complain. Whether they raise cattle or hogs, corn or strawberries, almonds or oranges, they’re always talking about how it’s the worst year ever, and they may quit. And yet they don’t! In fact, they’re driving a new truck!
But for some cattle ranchers, this really might be the year they quit.
“You can tell when these guys are whining, and you can tell when they’re getting squeezed at the end of the pipe and it’s real,” says Matt Danner, an Iowa farmer who raises feed for the cattle industry. “They’re getting squeezed at the end of the pipe. It’s past the whining phase.”
“There’s no profitability in the beef sector right now,” says Joe Goggins, who auctions cattle in Montana. “It’s a broken system.”
THE CIRCLE OF CYCLES
The situation was completely different seven years ago, when ranchers were in the driver’s seat and packers were making nothing.
A sustained drought back then made raising cattle on the range too expensive, so ranchers began reducing the size of their herds. The number of mother cows in the U.S. fell to a 70-year low.
Eventually, there were too few animals and too many packing plants. Those plants had fixed costs which weren’t covered by the number of cattle available to process, and some plants closed.
Then, as happens in a free market, cattle prices went up because there were fewer animals. Live cattle futures contracts traded on the CME shot up as high as $170 in 2014. Fed cattle futures contracts — younger cattle going to feedlots — reached $245.
With such great prices, ranchers started producing more cows again! But the packing plants did not rebound. You can figure out what happened. Too many cows, too little capacity. Cattle prices dropped as packers regained pricing power.
Those live cattle futures which traded at $170 in 2014 are now $120. Fed cattle went from $245 to less than $160.
HOME ON THE... RAGE
Ranchers don’t like it when they have zero pricing power, and many don't believe the current dip is purely the result of market fundamentals.
“I think a lot of it’s price manipulation,” says Eric Calkins. “They’re getting a lot of profit margin that the rest of us aren’t seeing… if this continues, there’s nobody that’s going to stay alive in the cattle business.”
Calkins admits he has no proof of nefarious activity. It's just a hunch.
Brett Crosby also says the current disconnect doesn’t add up. “There is definitely the ability for anti-competitive practices.”
Does he think meatpackers are actually breaking the law? Crosby pauses. “I personally don’t think they’re that dumb.”
Lee Reichmuth runs a small feedlot with about 1,000 cattle in northeast Nebraska. He gets calls “daily” from ranchers thinking of quitting. Reichmuth wonders if he’s being low-balled on prices so packers can import foreign beef to replace domestic supplies. “Do we want foreign-owned entities owning our supply chains?” Two of the big four packing companies are based in Brazil — JBS and Marfrig.
However, Dr. Glynn Tonsor, agricultural economist at Kansas State University, says cattle prices for ranchers have actually held up better than he expected.
HOW BEEF ENDS UP FOR DINNER
Let me take a minute to describe the life of a cow (I'm using the term "cow" to cover all cattle, though technically a cow is a mom.)
Raising a cow from conception to steak takes almost three years, much longer than pigs or chickens. This makes it especially tricky for livestock producers to predict what the market will look like down the road, and there are no government price supports for beef.
THE RANCH
It takes a cow 9-1/2 months to be born.
After it’s born, a calf stays on a ranch with its mother for another six to 10 months until it reaches 450 to 700 pounds.
Then it’s weaned from its mother and grazes on pastureland until 12 to 16 months of age.
Some females will be kept to become mother cows, and a few males will become bulls for breeding, but not many (sorry, guys).
THE FEEDLOT
The cattle are next moved to a feedlot to be fattened on a diet that usually includes grains like corn and soybeans.
They’ll stay here until they’re 18 to 22 months old and weigh between 1,200 and 1,400 pounds.
THE PACKING HOUSE
About 31 months after conception, cattle walk into the packing plant.
They don't walk out.
Most cattle are slaughtered at a federally inspected facility, then cut into sections and sent to distribution companies which take the beef to places like grocery stores and restaurants.
Now that I’ve explained that…
What’s really happening behind the scenes?
”I commit Monday and don’t know what I’ll get paid until Friday.”
Most cattle are priced in advance using a pre-determined formula based on the current price paid for cattle in the open “cash” market. The problem, say ranchers, is that so few cattle these days are being purchased on the cashmarket that it's become almost meaningless as a price foundation. Also, because so few animals are bought there, packers have little incentive to pay much for cash cows (a pun!). After all, any premium paid in cash would raise the formula prices.
What’s more, many of the pricing formulas are confidential, so no one knows who’s making what.
Confused yet?
Rancher Brett Crosby says it’s so murky that sometimes he has no idea what he’s going to get paid. “I have to commit Monday to sell to Cargill or JBS, but they won’t know what they’re paying until Friday, and I have no choice.”
”They can’t even get one of the other packers to come bid.”
Then there’s the lack of competition. Ranchers and feedlot operators are frustrated that often they only have one buyer in their area. “They can’t even get one of the other packers to come bid,” South Dakota rancher Justin Tupper told the Senate Agriculture Committee last week. “I think it’s huge that we get that second bidder in the marketplace.”
Not all ranchers agree. Kansas rancher Mark Gardiner also attended the hearing and said, “If we had a thousand processors, and they were all bidding on the cattle, my belief, and I’ll say it’s my personal belief, the fed cattle price today would be the same.”
”They couldn’t agree on whether to even have coffee.”
All of the major organizations representing cattle wrote to the USDA last month expressing their concerns. This is huge. This is unheard of. This is a big deal. These people are not pals. “You could get them in a restaurant and they couldn’t agree on whether to even have coffee, let alone whether they should have cream and sugar in it,” says Crosby.
One of those groups is R-CALF USA. CEO Bill Bullard believes desperate times demand a truce. “It’s been at least 100 years since we saw so many calls for an investigation into the failures of our beef supply chain.”
Here's Bullard breaking down the reasons why pricing formulas started in the first place, and why he thinks the process is broken. It makes my head hurt.
”If the packing plants would just pay us a little bit more of that margin, we’d be happy.”
Suffering most are the small feedlot operators who finish raising cattle. They’re having a hard time finding space at packing plants for their 1,400-lb. animals.
“It’s been tough,” says Lee Reichmuth, who runs the feedlot in Nebraska. As a result, he's started to keep some of his animals on the feedlot longer, which adds to the cost. The bigger the animal, the more it eats, and as cattle beef up, they become heavier and more expensive to transport (plus the quality of beef breaks down as a maxed-out animal starts converting food to fat — who knew?).
“If the packing plants would just pay us a little bit of more of that margin, we’d be happy,” he says.
”One of the most highly scrutinized industries.”
The Meat Institute (the packers’ trade group) points out that concentration of meatpacking ownership is not new. There have been four major players for decades, though it’s only more recently that two players became foreign-owned. Still, an institute spokeswoman says, “The meat industry, particularly the beef packing industry, has been and continues to be one of the most highly scrutinized industries when it comes to antitrust review.”
She says the problem simply boils down to a lack of both labor and capacity.
New plants are coming online, which will increase capacity by four percent.
Labor, however, may be a longer term challenge. The New York Times reports that JBS is offering several worker incentives, including a 30% jump in pay and free college degrees for employees and some of their children.
Even ranchers agree packers are facing a labor shortage. At Eric Calkins’ second job running another ranch, he’s having a hard time hiring help. “It’s almost impossible because they can sit at home and make more money off their unemployment than they could if they went to work.”
”They’re better off running.”
With beef demand so high, why wouldn’t packers run plants around the clock to process as many animals as possible?
They would if they could, says Glynn Tonsor at K-State. “Their facilities are very, very expensive… they’re better off running.”
Tonsor doesn’t see any evidence of market manipulation. In fact, he and fellow economist Lee Schulz from Iowa State agree that the packing industry’s ability to adapt during Covid “is remarkable.” The problem, to Tonsor, is mostly labor. “There’s a difference between physical processing capacity and operational capacity.”
”The stranglehold of meatpackers.”
Sen. Mike Rounds (R-SD) agrees, but he also wants to know if packers are using dysfunction in the market to import more foreign beef.
He’s leading a bipartisan group of more than two dozen members of Congress asking Attorney General Merrick Garland “to determine whether the stranglehold large meatpackers have over the beef processing market violates our antitrust laws and principles of fair competition.”
So… to recap…
If the causes of the current pricing problems are too much cattle, too few packing plants, a labor shortage, and/or anti-competitive practices — legal or otherwise — (inhale) — what are some solutions?
MORE PACKING PLANTS
This is happening. Slowly. It’s expensive. Very expensive. Three new plants are coming online, according to the Meat Institute, and an independent cattle producer in Iowa just announced plans to build one to serve local ranchers.
In addition to building new plants, bringing back mothballed plants is also costly and time consuming.
The USDA announced funding to help build new plants and expand existing capacity as part of a $4 billion plan to improve the food system. (The department is also handing out more aid to livestock farmers as part of $11 billion in pandemic relief.)
INCREASE TRANSPARENCY ABOUT CATTLE PRICING
Packers have to report to the USDA what they pay for cattle under Livestock Mandatory Reporting (LMR). That policy is set to expire by the end of September, but it might not be renewed because so many changes have been proposed to LMR that Congress may not get to it in time. The National Cattleman’s Beef Association says failure to renew LMR “would be a catastrophic and instant loss of market transparency.”
Proposed changes include:
— Forcing packers to buy a lot more cattle on the open “cash” market. A lot more. Like, half of all purchases.
This legislation would give cattle producers a better real-time understanding of what cattle are worth. But analysis from the Juday Group suggests it might go too far in regulating how packers buy animals. “Mandating more cash purchases does nothing to remedy interrupted slaughter capacity.”
— Creating a price library.
Ranchers want a cattle contract “library” which allows them to have a better idea of who’s getting paid what. “It will show people what other feedlots have negotiated,” says Brett Crosby.
BRING BACK “COUNTRY OF ORIGIN LABELING” (COOL)
This is a touchy subject.
Some agricultural products have to state whether or not they’re grown or raised in America, but COOL labeling for beef was repealed six years ago after the World Trade Organization slapped a $1 billion penalty on the U.S. based on complaints from Canada and Mexico.
Currently a processor can sell beef as “Made in the U.S.A.” even if the beef is imported and merely repackaged here.
Rancher Eric Calkins says the repeal of COOL in 2015 was not cool. It was the beginning of the downward push on cattle prices, and he wants it back. “Give the American people the right to buy American beef.”
Sen. Mike Rounds has become a believer in COOL because he thinks it will give American ranchers a competitive edge and make American consumers more aware. “What we don’t want to have happen is to be reliant on other countries for one more source of food.”
But here is one instance where the National Cattlemen’s Beef Association breaks from the herd. It believes COOL labeling could trigger another trade war, and it says a USDA study in 2015 found the cost of compliance outweighed the benefits. The NCBA prefers “voluntary origin and value-added marketing opportunities.”
ALLOW STATE-INSPECTED MEATPACKING PLANTS TO HELP
Usually, only federally inspected meat plants can sell beef across state lines. To help ease the current logjam, Sen. Rounds supports proposed legislation to allow state inspected facilities to do the same.
“They have to follow the same federal guidelines as a federally inspected meat facility,” he says. “If I have a plant that’s in the eastern part of South Dakota right next to the Minnesota border, they can sell their products all the way over to a city 400 miles away (in South Dakota), but they can’t sell 10 miles away in Minnesota.”
However, the packing industry’s trade group says federal standards are there for a reason. “Food safety should be non-negotiable.”
In the meantime, Congress plans to spend $60 million helping state-inspected meatpacking plants become federally inspected, providing more competition and easing the logjam.
ROBOTS
Wouldn’t it be great if you make up for a labor shortfall with machines running 24/7?
JBS has been working in Australia with robots which can help butcher lamb.
But not cattle.
Not yet.
“There’s been interest in robotics for a long time,” says Prof. Tonsor. The problem is that cutting up a cow remains a skill that machines have not yet mastered.
“It’s very labor intensive, because not all carcasses are the same,” says rancher Brett Crosby.
KILL MORE CATTLE
What do you do when there’s too much supply and too little capacity to handle it?
You reduce the supply.
It’s happening!
“We’ve killed more mature cows than any time in the last 10 years,” Crosby says.
Short term, this could be good for consumers, as a glut of beef hits the market. YOU COULD SEE RETAIL BEEF PRICES START TO GO DOWN.
Long term, it’s not good. Beef prices could go back up because of fewer cows (unless imported beef makes up the difference, which is what ranchers fear).
OH, AND THE DROUGHT…
The culling of the herd is already happening not just because of the packing situation. Another bad drought is making it difficult to raise and graze cattle. Nebraska rancher Martin Swayne occasionally auctions cattle, and he sees what his neighbors are doing. “They’re selling calves, cows and bulls, whatever they can get rid of that doesn’t really hurt the operation at this time.”
Swayne says Mother Nature may do more damage than any conflict ranchers have with meatpackers. “If we don’t get a pretty good rain here in the next few weeks, (packing capacity) is not going to matter.”
None of these solutions addresses the labor shortage in meatpacking.
I mean, ask yourself, how much money would it take to convince you to do a job which can be very difficult and risky, one that includes moving and cutting large carcasses, when you could work at that new Amazon fulfillment center instead? This is a problem meatpackers will have to figure out. Higher labor costs will cut into margins, unless the cost is passed on to consumers... or packers make up the difference with imports.
WILL THE AMERICAN COWBOY RIDE OFF INTO THE SUNSET?
Eric Calkins hasn’t thrown in the towel on ranching yet, even as he’s taken an outside job to survive. “If I didn’t kill my own beef to eat, we couldn’t afford to eat it,” he says. Calkins is a certified welder and could certainly make a good living in that profession, “but it’s not what I want to do with my life. I grew up wanting to be a cowboy.”
Brett Crosby uses risk management tools in the commodities markets and makes decisions almost daily on how to stay afloat. “Can I generate the most cash by keeping some of my calves and running them back on grass before they go to a feedlot? Should I just send them to the feedlot and retain ownership on them? Or should I just sell my cattle outright?” He’s been doing a combination of all three.
If they can hang on, it’ll probably get better. The odds that we’ll import all of our beef are low, for now, and the cattle industry is unlike any other livestock operation in the country. Long term, that plays to the cowboy’s advantage.
“If Corporate America could figure out a way to raise a calf without a cowboy, they’d do it,” says Sen. Rounds. “They haven’t figured out how to do it yet.”