Cattle feedlots are running out of space, and several processing plants are running at a low capacity or closed. Washington D.C. could soon take action.
Drovers reports there's a proposal developed by Beef Alliance that would fund placing feedlot cattle on a maintenance diet for 75 days. The proposal, called the Fed Cattle Set-Aside Program, would seek to alleviate the risk of massive economic collapse in the beef cattle industry.
It is an organization of commercial cattle feeders with members in Colorado, Kansas, Nebraska, Texas and the Pacific Northwest. According to Farm Journal Washington Correspondent Jim Wiesemeyer the proposal is floating around Washington and the cattle industry.
“They are calling it a concept paper even though the title when you get it says final,” says Wiesemeyer. “It just got to the House and Senate Ag Committee a few days ago. A lot of people are not commenting on whether they agree or disagree with it. I will tell you the key barometer will supposedly come later this week. We want to see what the National Cattlemen’s Beef Association has to say about this proposal.”
Wiesemeyer says the program may need legislative authority. The proposed payment rate for cattle in the Set-Aside program will be fixed at $2.90 per head per day. It is intended to offset additional feed and operating costs incurred by holding cattle back from slaughter for 75 days.
A new report from CoBank says even if the reduced processing capacity at the nation's beef and pork plants is temporary, the effects will likely have a lasting impact on the entire meat industry.
The company’s economist estimates meat supplies at grocery stores could shrink nearly 30% by Memorial Day, leading to prices rising by as much as 20%. However, some cattle producers say they are barely hanging on due to futures prices.
Iowa feed yard operator Jeff Pruess has been in the business for decades but says it was hard to prepare for 2020.
“It has always been a tough business but it’s never been worse than it is now,” says Pruess, based in Clarence, Iowa.
COVID-19 is complicating issues in the cattle market. Plants are significantly slowing down production or closing down as well.
“On the beef side, over the last three weeks, we have produced about 300 million pounds less beef than we did in the same period one year ago,” says Oklahoma State University Extension specialist Derrell Peel.
Feedlots are staying full and cattle are getting larger with limited places to go.
“It’s been really hard to sell any cash cattle in this area for about five weeks,” says Pruess. “We are burning up equity at a fast rate. If something doesn’t change, it’s going to force us out of business.”
Live cattle futures contracts are trading less than a dollar as boxed beef values continue to break records due to retail buying at the grocery store.
According to CZ Analytics, the daily spot choice box beef cutout ended the week on Friday, May 1, at $377.45— that’s $84.08 higher compared to the previous Friday. On the same Friday last year, boxed beef was $227.36. On Thursday afternoon, the Choice cutout was $458.54.
Pruess says, “[Boxed beef is] over $3.60 per hundred and the best bid you can find is $1? That’s limited, [that price] is more like 93 cents, 94 cents or 95 cents. At what point is something going to be done?”
It’s severe enough [where] there’s people generally concerned about their livelihood. People I thought I’d never have to worry about,” says Phil Reemtsma, a cow-calf producer, feedlot operator and veterinarian in eastern Iowa.
The creators of the Sterling Profit Tracker, which estimates packer and producer margins saying they will not release a report this week because the model used “does not adequately account for those added costs.”
According to hedgersedge.com, packer profit margin estimates are well over $700 per head. However, that estimated number may not be exact because it doesn’t account for changes as plants aren’t running at full capacity and changing labor costs.
“We can lose between $200, $300 or even $400 per head,” says Pruess. “[It] depends on how we end up selling these cattle the next few weeks.”
The National Cattlemen’s Beef Association (NCBA) says the cattle market could lose more than $13 billion due to the coronavirus. Relief is on the way for producers. There is agriculture relief money through the Coronavirus Aid, Relief and Economic Security Act (CARES). The U.S. Department of Agriculture announced it would issue payments to producers affected by the virus.
Many want the packers to pay what they feel is a fair price.
Reemtsma says, “How about instead of paying 95 cents and boxed beef is $360, how about [the packer pays] a $1.20 or $1.25 [to make producers whole] rather than the government bailing [producers] out?
The wide margin is gaining attention.
Drovers reported President Donald Trump told reporters on Wednesday he has asked the Justice Department to look into allegations that U.S. meat packers broke antitrust laws because the prices paid to farmers and ranchers have declined even as meat prices rose, Reuters reports.
“I’ve asked the Justice Department to look into it. ... I’ve asked them to take a very serious look into it, because it shouldn’t be happening that way and we want to protect our farmers,” the president said at a White House event attended by Secretary Perdue and Iowa governor Kim Reynolds.
Before the president’s words, many organizations sent a letter to the Department of Justice last month asking for an investigation on price fixing by the meat packing industry. The letter alleges four companies control more than 80 percent of beef processing.
USDA already lumped the COVID-19 crisis into the Holcomb, Kansas, investigation.
“Rest assured, if the investigation yields any evidence of any violation of the Packers and Stockyards Act, we will begin immediate and necessary enforcement action and appropriate initial referrals to the Department of Justice for further consultation,” Sonny Perdue told the Commodity Futures Trading Commission in April.
There are concerns contracts at the CME are not reflective of the cattle market on a day-to-day basis. Reemtsma says the pricing tools are dysfunctional because of market volatility. He says increased fund participation doesn’t help.
Reemtsma says, “You have the funds in there using it as their own personal playground to drive the market one way or another all to make a bunch of money for themselves.”
NCBA says the risk management tool needs to return to being a good producer risk-management tool.
“The futures markets were put in place to try to help producers hedge their risk,” Colin Woodall, CEO of the National Cattlemen’s Beef Association, said on AgDay this past March. “You need liquidity in the market, you need people that are speculators, somebody [who] doesn’t actually own or produce a commodity to jump in and to help make those markets work. What we see right now, we have a number of hedge funds, a number of entities that are utilizing an algorithmic or formula-based trading. When they do that, they no longer worry about a Cattle on Feed report, they no longer worry about a weather report. They no longer look at demand because that computer is looking at a formula of when it should buy and when it should sell.”
In a statement, the CME Group says, “CME Group is actively engaged with market participants and trade organizations to ensure that our products remain effective hedging tools for the commercial hedger during this time of unprecedented market conditions. CME Group operates a comprehensive surveillance program to ensure our markets function as designed, provide price discovery, and facilitate risk transfer.”
The CME Group says prices do not determine packer margins and futures price represents the price of live cattle delivered to the packer. Therefore, the price of boxed beef and packer margins are determined by the packer and the price at which they sell the finished product.
In the meantime, feed yards continue to feed cattle and will see where the industry lands after COVID-19.