Packer Bad: During the past several weeks, my columns have addressed several important themes across the business based on an email from a reader. About the same time, I received a separate email responding to Free Market Doing Its Thing. It contained many of the same complaints, most notably the anti-packer sentiment:
From 2016 to 2022 packers had almost no week s [sic] of operating margins in the red. They were consistently reporting huge profits. While almost every one [sic] else was losing money or eating up equity.
We vs. Them: All that was covered previously in Think vs. Know. The grumbling “posits packer versus producer – positioning the business as a zero-sum game. The assumption always being, the more ‘they’ (packer) get, the less ‘we’ (producer) get.”
The discussion included data detailing annual returns to cattle feeders versus the live-to-cutout spread (packer gross margins). Despite claims to the contrary, the relationship between packer margins and closeouts over time is actually positive – not negative.
Feeder Cattle: But now the most important part. The reader then asks, “…do you think their [sic] shouldn’t be any cash market for fat cattle? Why is the auction, cash market so effective for finding true price discovery for feeder cattle?” The reference to feeder cattle especially caught my attention on several fronts.
- Receipts: First, a little over a year ago, I specifically addressed the topic of feeder cattle and price discovery. Most important, auction market receipts (as a % of calf crop) declined steadily between 2010-and-2015 and have since stabilized. Moreover, sale barn receipts overstate respective market share - there’s a portion of calves that get sold multiple times through the auction market system. The key take-away being, “farmers / ranchers are [willingly and purposefully] also opting out of the price discovery process.”
- Trends+: CattleFax recently (May 24) presented their spring Trends+ webinar. The discussion included results from the most recent Cow-Calf survey. (see graph below) In each of the past three years, auction market values trailed both direct trade and forward contract / video venues. Additionally, moving out of the lows of ’20 into ’21 auction market values remained flat while the other venues both saw substantial improvement.
- Collusion: Perhaps a bit of piling on here. Nevertheless, it’s pertinent. One of the industry’s loudest proponents for more cash trade recently disparaged integrity of price discovery at the sale barn (attempting to draw parallels to alleged packer collusion):
I’ve watched cow buyers collude my whole life where weigh-up cow buyers take turns with each other. They’ll kind of sort the cows as they come in because they all look at them the same and you know everybody gets their share. It’s amazing how good a bunch of weigh-up cow buyers can get along with each other whenever they’re supposed to be competitors.
If that’s true on the cow side, the same principle applies for feeder cattle, too.
That doesn’t instill much confidence for sellers. And coupled with the Trends+ data, further undermines any claim “…the auction, cash market is so effective [in terms of] true price discovery.”
WYSIATI: So, where does all this leave us? None of this discussion is intended as wholesale criticism of the auction market system. Rather, it’s meant to unravel a coffee shop talking point that over-simplifies the business (see Chessboard of Producers and Business First, Market Second). And thus, calls into question sweeping generalizations regarding sale barns, price discovery and subsequent implications for the fed market.
And ultimately, it’s less about auction markets and more about how (and believe) what we think (see Think vs. Know). Taking that one step further, Daniel Kahneman (Thinking Fast and Slow, c. 2013) explains we’re “prone to have high confidence in unfounded intuitions.” And he explains we often derive conclusions based on incomplete information, and labels that reasoning process (or lack thereof) WYSIATI (what you see is all there is).
Kahneman warns that inclination leads to unfounded certainty and erroneous conclusions: “the confidence people have in their intuitions [I think] is not a reliable guide to their validity [I know].” With that, what’s the key takeaway amidst all this discussion? Don’t believe everything you think.
