Gregory Bloom writes a blog for MeatingPlace where he shares over 26 years of industry experience working in six USDA inspected meat plants - buying and selling meat, working with chefs and restaurants and teaching COP classes. He is the CEO and owner of U.S. Protein. This blog first appeared on MeatingPlace on June 3, 2021, and is reprinted with permission from MeatingPlace. The views and opinions expressed in this blog are strictly those of the author.
In recent news, some in the cattle industry are looking to the federal government to come to their rescue.
Here’s a quote from the article, “The price of live cattle has plummeted in the last several years while the price of boxed beef has significantly increased and lifted prices paid by consumers at grocery stores, the senators said.”
Now, why would we ask the feds to get involved in an issue that is largely supply and demand coupled with a lack of labor in beef plants?
For six years, I bought cattle for a small beef packer in Colorado. I bought two ways: on a weekly spot cash basis and on a set advance formula basis.
Some call it grid pricing or captive supply or marketing agreements, but I just called it an agreed upon formula, that was negotiated quarterly or monthly and based on several factors. The formula I used to buy cattle was based upon the market price for live cattle. It factored in the prices for the boxed beef cutout, plus had an overage for high quality cattle and a deduction for low quality cattle.
This formula was fair, as it allowed me, as the buyer, to deduct for cattle that graded Select instead of Choice, or were yield grade 3 or 4, or that that had bloodshot or dark cutter carcasses. For cattle that were yield grade 1 or 2 and graded high Choice or Prime, an overage was paid on the formula. This formula worked well for most the cattle that I bought. It was fair to me, the beef processor and the producers, and it kept emotional, subjective speculation out of the transaction.
But, I didn’t buy all the beef on formula. I negotiated weekly on a cash basis for the extra loads that my plant needed.
When I needed cattle — because boxed beef demand and prices were worthy — I’d pay up for spot loads. Much of the time, these loads cost more than the formula-priced loads. Cash prices shot up if live cattle availability was tight.
When I didn’t need cattle – because the boxed beef cutout pricing wasn’t keeping up with live cattle prices, or when demand for boxes was sluggish — I’d lay low and let my cattle sellers call me with offers. Sometimes I’d buy nothing. Cash prices would cave, especially when there were just too many cattle needing a slaughter plant – like now.
It was all simple supply and demand economics that determined the prices.
I recently spoke to a friend of mine who buys a lot of cattle on weekly basis, both on formula and cash. I asked him about grid/formula pricing vs. cash pricing for cattle.
He explained that if you’re going to need say, 60,000 head of cattle on a weekly basis and you have agreements with the largest cattle feeders in the country to buy, say 95% of the cattle you need on formula, that only leaves 5% of the cattle you need weekly on a cash basis. This low amount of cash cattle needed will drive cash prices down, creating volatility. But then the market changes in say, six weeks or six months, as it does, and you could be buying just 80% of your cattle on formula and the rest on cash. If the demand for boxed beef is strong you need to buy cattle, as you’re competing with other large buyers on the cash market, and the market gets crowded and noisy. The bottom line is that cash trading makes the market go lower than it should go at times and higher than it should go at times, which creates volatility.
This was my experience also. Now some industry economists may not agree, but when you’re sitting in the cattle buyer’s chair daily, you’ll find that buying more loads on cash creates more unnecessary havoc in the marketplace but it doesn’t always lead to overall better prices for producers.
Let’s face the simple facts: We’ve got too many cattle in the market. Packers are having labor issues and can’t run at 100% capacity. This problem will be solved in two years and prices for live cattle will favor producers more than now.
But do you really think the jam we’re in now with live cattle prices will be fixed by the DOJ? Do you think the DOJ will find any packer collusion practices? I do not.
