Potts: Supply, Demand Balance Without Government Intervention
The following commentary was provided exclusively to Drovers and are the views and opinions of Julie Anna Potts, President & CEO of the North American Meat Institute, and are not necessarily those of Drovers or Farm Journal. Links to related articles and opinions are posted at the end of this column.
In these pages there has been much focus on whether the beef and cattle markets are broken and in need of government intervention or are simply responding to market forces as expected.
Those who favor government intervention say cattle prices have “remained depressed for the past seven years” selecting as a benchmark the record cattle prices of 2014-2105. Not coincidentally, the overall cattle inventory in 2014 was at its smallest since 1952, which dates back to the Truman Administration. High prices from tight supplies are the result of market fundamentals at work.
Likewise, high prices are an incentive to expand production. From 2014 to 2019, the cattle herd in the U.S. grew from 88.2 million head to 94.8 million head. Indeed, 2020 started with the supply of feeder cattle – both on feed and outside feedlots – at a decade high for January. Two-and-a-half months later, however, COVID hit.
Plants were temporarily idled, slaughter rates were constrained, and cattle became backlogged. That imbalance between cattle supply and the ability to harvest them was detrimental to cattle prices in 2020. Regardless of physical packing capacity infrastructure, operational capacity was diminished due to the COVID pandemic, and a lack of labor and on-going supply chain disruptions through much of 2021.
Most telling, however, is a now popular and implicit argument that packing capacity should viewed as if it’s a public utility – constructed, capitalized, staffed, and maintained to handle peak capacity at all times. Critics ask rhetorically “whose fault” is it that there’s insufficient packing capacity and “who owns the shuttered plants?” As if packing plants can – and should – be turned on and off at the flip of a switch.
Plants were shuttered over the past decade, as many were forced to operate short term in the red. On average, packing sector margins were negative in 2012, 2013, and 2014 owing to a seven consecutive year decline in the number of cattle, and an overall reduction of about 10 million head compared to 2000. Like cattle supplies, packing capacity was at its low point in 2014, and also like cattle supplies packing capacity has steadily increased since.
The supply of cattle remained large in 2021. USDA reports that the cattle-on-feed inventory reached the second highest monthly total on record for seven months, each month from February through June, and then again in September and October. However, packers responding to record beef demand worked their way through the supply of market ready cattle last year, primarily by adding over-time Saturday shifts, especially during the first half of the year. Total Saturday slaughter during January through July 2021 was up 33 percent over the more normal 2019.
As a result, USDA’s December 2021 livestock slaughter report showed cumulative annual cattle slaughter up to its highest since 2011 at 33.184 million head, making 2021 a record year for beef production at an estimated 27.9 billion pounds.
Moreover, as slaughter rates recovered, and the industry worked through the backlog of cattle, fed cattle prices rebounded to seven-year highs as supply and demand balance was restored – without government intervention in the market place.
Related columns:
Cornett: A ‘Hard Cull’ On The Facts
Packers and Allies Urge Congress to Do Nothing in Face of Broken Markets
Speer: Policy Makers Should Just Leave Well Enough Alone
Speer: Is Fair What We Really Want?
Uhl: The quest to improve cattle markets
Speer: Business First, Market Second
Cornett: 'What Does the End of Beef Mean for Our Sense of Self?'
Cornett: Cattle Markets Could See ‘Techtonic Shifts’
Cornett: Insights From 'A Yankee' Feeder
Cornett: Stewardship and Sustainability Will Influence Price Discovery
