Beef producers and economists shared the witness table at an unprecedented Senate Agriculture Committee hearing on June 23 -“Examining Markets, Transparency, and Prices from Cattle Producer to Consumer” - to allow senators to hear first-hand more about the many challenges facing the beef sector.
The hearing started off with a stark message from South Dakota auctioneer and cow-calf producer Justin Tupper that many cattle producers are receiving less than a 1% return, while the gross profit margin for packers are over 80%.
While packers are making “unbelievable profits,” cattle producers are going out of business and consumers are paying double or triple at the grocery store, Tupper says.
He argues producers today no longer have a competitive market as a mere four companies control nearly 80% of the cattle processing supply. Previously four or five bidders would offer prices to producers for their cattle, however, the fat cattle trade today often doesn’t have a second bidder. “There’s simply not enough market participants,” Tupper explains.
The second bidder offers that competition and prevents a single buyer from setting a price and exerting market power. “The only way to have price discovery is to have a second bidder,” Tupper says.
“In traditional market times it was assumed when boxed beef prices rose, packers would ramp up chain speed to increase profits. Instead, they’re using limited chain speed and shackle space to increase profits and make the same money or more harvesting less cattle,” Tupper says. “So, producers see huge losses of equity while the packers reap all the rewards despite having the least amount of risk and owning the product the least amount of time.”
From 2000 to 2015, the U.S. beef industry experienced a net decline of roughly 14,000 head per day in fed cattle processing capacity, testified Dustin Aherin, animal protein analyst at Rabobank. Some efforts are going on to bring some new capacity back online, but it comes at a high cost.
If all of the announced plans for plant construction and expansion come to fruition, roughly 8,000 head of daily fed cattle capacity and nearly 2,000 head of daily non-fed capacity could be added to the US beef industry over the next five years, Aherin adds.
“A note of caution. There is a point where industry capacity expansion goes too far to withstand cyclical periods of tight cattle supplies. The long-term cattle cycle, drought risks, and market fundamentals must be considered,” he warns.
Unintended consequences
Meanwhile, Mark Gardiner, the owner-operator of Kansas-based Gardiner Angus Ranch and a member of the National Cattlemen’s Beef Association, explains what caused the most recent turmoil in the beef marketplace is not complicated.