Hijacked Market

Cover Story - Hijacked Market

(Progressive Farmer image by Robert Lagerstrom)

Cattle producers from one end of the country to the other are convinced their markets were long-ago hijacked by the "Big Four." Namely, they blame Cargill, JBS, National Beef and Tyson -- who collectively control more than 80% of the U.S. slaughter market for beef -- for pricing inequities.

Confidentiality agreements these buyers operate under are allegedly responsible for thin cash markets and what many cattlemen believe are absurdly low prices at the farm level. Simply put, as COVID-19 drove up beef demand and sent prices received by packers soaring, cattle producers struggled to understand why they were losing money. That struggle continues.

The visuals have been damning. Empty meat cases at the grocery store and packer margins nearly $600 per head higher mid-March than they had been a few short weeks prior poured gasoline on a long-burning fire of discontent over price reporting.

Meatpackers blamed consumer panic buying, restaurant closures, plant shutdowns and illnesses among plant workers for a supply bottleneck that quickly pushed up prices. A look at the numbers shows production dropped precipitously in a short period of time. For the week of Feb. 22, 2020, prior to nationwide shutdowns, red meat production in the U.S. was estimated at 1,087.9 million pounds. During the last week of May 2020, beef production was at 428.6 million pounds.

In late January when the U.S. Health and Human Services declared COVID-19 a public health emergency, Choice boxed beef cutout value was $215.32 per cwt. By mid-May, that price was reported at $475.39 per cwt -- a $260.07 per cwt increase. Producers, however, during the first quarter of the year saw prices fall for feeder cattle. By June, many were essentially forced to hold calves longer as sale barn reports pointed toward a range of $135 to $145 per cwt on 600-plus pound calves. The futures market looking to August was an anemic $95.6 to $96.9 per cwt on live cattle as reported by the Chicago Mercantile Exchange (CME).

Veteran cattle producer Bill Yancey sells about 140 calves each year. He is based at Prairie Grove, Arkansas, and often sells at the Joplin regional sales barn. He notes that regardless of what feedyards may or may not need to buy, calf prices always follow futures.

"If the futures are up, my calves are up. If they're down, so are my calves. CME has a lot more to do with my price than anything else. It seems that once the buyers that day see the CME is down, we don't have any chance of running prices up, and we have to take what they will give us. When you consider the fact that the CME doesn't have much to base its price on anymore, I feel we aren't always getting a fair deal."

As a result, Yancey says he is increasing his use of sales by video auction and is maximizing values on his calf crop with NHTC certification (Non-Hormone Treated Cattle). He still thinks, though, he and others would benefit from more price discovery.

"Packers are making money hand over fist, and our side of the industry is shrinking. I guess I'd be for a mandate to force them to buy a percentage of cattle on the cash market, but the devil is in the details. I don't like government intervention, but at this point, who is going to look out for the cow/calf producer?"

DTN livestock analyst ShayLe Stewart agrees with Yancey. She comes at the issue from the perspective of both a cow/calf producer and a professional market analyst. She lives and raises SimAngus cattle with her husband, Jimmy, in Cody, Wyoming. Stewart has long held the position there's an unfair advantage when feeder cattle sell in a competitive market yet fat cattle sell in what is essentially a noncompetitive market. "We can't have an industry that functions properly when different segments are competing and achieving highs and lows, while others due to size and confidentiality clauses have found a way to buy behind a curtain."

Stewart notes the degree of discrepancy depends on the region in which a producer sells cattle. Northern producers, for example, see more participation in cash markets (more than 50%), while in the South, as little as 7% of sales are typically in cash trades.


Clamping down on meatpackers and increasing competition and transparency when it comes to price reporting has been on Sen. Charles Grassley's (R-Iowa) bucket list for years. He first introduced legislation in 2002 to bring more transparency to cattle pricing. On May 12, 2020, he once again introduced legislation with this same goal.

This bill, cosponsored by Sens. Jon Tester (D-Mont.); Tina Smith (D-Minn.); Joni Ernst (R-Iowa); Mike Rounds (R-S.D.); Cindy Hyde-Smith (R-Miss.); and Steve Daines (R-Mont.), aims to amend the Agricultural Marketing Act (AMA), which is up for renewal in September. While the bill and its goals are not new, the timing may be perfect.

In summary, as it stood at press time, the bill requires packers to acquire no less than 50% of the cattle they will process within 14 days through spot-market cash sales from nonaffiliated producers. The sales agreement would be entered into "under circumstances in which a reasonable competitive bidding opportunity exists."

The regulation would not apply to dairy-bred, dairy-bred cross or beef animals more than 30 months of age, or a foreign-born animal. Packers who own only one processing plant are exempt under the requirements.

Some cattle market analysts have insisted what the industry has seen this year is a cattle market that works, and producers have to take the good with the bad. Others believe it's a broken system. A lot of views are on the table, any of which could impact cattle markets for years to come. The time has come for cattle producers to thoughtfully consider these opinions, weighing their options and boldly speaking out about how they believe such proposed changes would impact their home operations. The future of the cattle industry is at stake.


Senior policy analyst for the United States Cattlemen's Association (USCA), Jess Peterson, sees a need to clarify how existing price reporting rules and confidentiality standards are working.

USCA is a Montana-based organization with policy headquarters in Washington, D.C.

Peterson says: "The Livestock Mandatory Reporting program will expire Sept. 20, 2020. As Congress and industry stakeholders work together on needed changes to the program in the months ahead, we expect this [Grassley] bill will play a large role in our conversations."

Peterson adds USCA has made price reporting a key emphasis for more than 10 years.

"When we look at the fundamentals of the cattle market, there are just screaming differences in boxed beef prices and what producers are being paid," Peterson explains. "Let's look at this and ensure the fundamentals are better aligned for the industry. You have to have a certain minimal number of cash trades to base a market on and to reflect a true value for cattle. We don't have that right now."

Peterson says price reporting modifications are possible every five years, so he isn't looking at the Grassley bill as a piece of stand-alone legislation that, once put into place, would never be touched again. There would be opportunities to refine it as needed to ensure it is working as it should for everyone.

It's especially important, he adds, that cattle contracts become less challenging for those taking long positions in the market. Cash market transparency is key to accomplishing this. "The CME [Chicago Mercantile Exchange] has tried to work with us, and I know they are actively looking for solutions. CME wants to make sure the cattle contract is working properly," he says.

"The bottom line is we can't get this done, because we have self-serving actors undercutting the cattle market. If this were happening on Wall Street or in the banking or credit sectors, it would have already been addressed."


South Dakota rancher Todd Wilkinson, policy division chair for the National Cattlemen's Beef Association (NCBA), says what the industry doesn't need right now is a government mandate.

"Our biggest concern is not the impact on the packer but on the producer," he stresses. "I'm in an area where I deal with the negotiated cash trade daily for our family feeding operation. We are probably the highest in negotiated trades in the country. But, if there is a government mandate that the big packers have to buy 50% of their negotiated trades on a cash basis, we are concerned producers using formula pricing may face a situation where the packer can't give you a bid because he's maxed out on the amount of formula trade purchases he can make for the period, and you have to go to the cash basis."

Wilkinson supports more cash trade, but at the same time, he doesn't want to force producers to move away from formula or grid trade.

"I think we would be taking away options," he insists. "The seller would be limited on how they could sell, and that could be really disastrous."

A better long-term solution to thin cash markets, Wilkinson believes, is encouraging more regional packers with increased capacity. This, he says, should be the goal as opposed to a government mandate.


Ranchers-Cattlemen Action Legal Fund United Stockgrowers of America, known in cattle circles as R-CALF, is standing firmly behind the Grassley proposal.

Bill Bullard, chief executive officer of the group that built a reputation on support for mandatory country-of-origin labeling, says they have wanted to see Grassley's bill adopted since 2002.

"We worked with Senator Grassley to introduce the first version of this legislation," Bullard says. "We recognized back then the meatpackers were systematically shifting large volumes of cattle out of the cash market and placing them into their captive supplies where no cash discovery occurs."

Bullard believes the cattle industry has a dysfunctional market, and he calls the current bill "triage" to preserve the integrity of cash markets. He says the COVID-19 pandemic put a floodlight on how broken U.S. cattle markets are.

Asked if a less drastic fix is possible, such as elimination of confidentiality agreements regarding prices packers pay, Bullard says it won't be enough to solve the market's problems.

"We've argued against those guidelines, which were put into place shortly after the livestock reporting act was passed," he says. "Today, Colorado, thanks to these rules, doesn't even report prices due to that overly restrictive requirement. But, we have gone too far. Just eliminating confidentiality agreements won't restore lost bargaining power between producers and meatpackers."


Stephen Koontz has gotten a lot of recent attention about a study he did in 2007 as lead economist on a USDA Grain Inspection, Packers and Stockyards Administration project. His work looked at price discovery and alternative marketing agreements (AMA) in the cattle business.

Supporters of Sen. Charles Grassley's cash market mandate plan used Koontz's work to bolster their position. But, the agricultural economist, based at Colorado State University, wrote a public letter to the National Cattlemen's Beef Association stating he is not in favor of a plan to mandate packers buy a percentage of cattle on the cash market. "My work does not recommend, and I do not support, a mandate of a given percentage cash trade."

In response to questions from Progressive Farmer, Koontz elaborates on his position and his letter. Most importantly, he wants producers to know he believes such a mandate will only increase operation costs for both packers and feeders.

"Suppose the mandate passes. It could easily increase packing costs $10 per head and cattle feeding costs $25 per head," he explains. "If a packer has $10 higher costs, will their fed cattle bid be $10 less? If the feeder has $25 higher costs, will their cattle bid be $25 less?"

Koontz believes the cow/calf operator would easily be looking at $35 less under such a mandate. And, he stresses this is not him just picking numbers out of the air.

"We have published research that says it's likely $10 for packers and $25 for feeders will be the cost to adopt this system," he says. "Would $35 less put some cow/calf operations out of business? This policy costs the cow/calf industry billions and billions quickly, and it's a cost that won't go away."

Koontz concludes this proposed policy is something that has been pulled off the shelf as a solution to bad and unforeseeable market events with no research to support it. The only winners, he adds, aside from politicians and those in the industry pushing their agendas, will be cattle feeders in the Upper Midwest.

"This requirement is really going to hurt the Southern Plains feeding and packing industries, and the cow/calf folks who supply that system."

David Anderson, Texas A&M Extension economist, says from his perspective, while the cattle market has gone too far in terms of not having enough cash trades reported, it didn't happen overnight.

"This has been a long evolution, as we've gone to more formula-priced cattle," he explains. "There are plenty of formulas with premiums and discounts today for quality, and thanks to that, we've boosted the percent of Choice and Prime we are delivering to our consumers."

Anderson doesn't think a mandated buying policy for packers is going to help, noting more price discovery for cattle traded in a negotiated process doesn't necessarily mean producers will get higher prices. The two, he stresses, are not connected. He also struggles with the idea of a mandate.

"For the most part in America, we don't tell people how they have to buy something. We are overlooking the fact that there are advantages to buyers and to sellers in grid pricing, and there are alternatives to negotiating a fed market. If we move in a different direction from where the market has moved us, we might actually impose more costs on feeders and packers."


There are ways to have more price reporting without a government mandate or adding costs to cattle procurement. Known simply as "blockchain technology," many leaders in the cattle industry believe it's a viable option today.

Veteran Texas cattleman Bill O'Brien describes blockchain as "a public ledger of all transactions that are executed in a particular market." He believes the industry's focus on the Grassley bill is misplaced, and that it could lead to more confidentiality around pricing.

"People will figure out all kinds of ways to game the system, and pretty soon, we will find we've not accomplished anything except create an environment where there are a bunch of subdeals, and no one knows what anyone is paying," he says.

O'Brien, owner and manager of Texas Beef, based at Amarillo, markets more than 200,000 head of cattle each year. His ties to the cattle business run deep, going back to the late 1800s, when his grandfather moved to the Texas Panhandle from Missouri.

He recalls in the early days of commercial cattle feeding, the industry started selling everything FOB (Free on Board) from the feedyard for seven-day delivery. All the packers would bid, and that was it. Today, there are many more ways to sell cattle, but O'Brien says few are being properly reported.

"We're selling on negotiated grids, live FOB, delivered, basis futures, formulas, the list goes on. We've got a lot of ways to sell cattle. The problem is that mandatory price reporters simply don't know how to parse all those transactions into an understandable form. We are using arcane reporting methods."

With blockchain, O'Brien says the cattle industry would not have to rely on mandatory price reporting. A longtime proponent of the technology, he notes there's an important connector: the RFID (radio-frequency identification) ear tag. This is how blockchain tracks cattle and the data tied to individual animals when ownership changes.

"Whether it's one head, 100 head or 100,000 head, there's a price point, and there's a weight, and it's reported with blockchain. What could be better for understanding the market than every time cattle change hands in real time, you are able to see that? It's data-based management, it's not expensive, and we have the capability to do it right now."

Asked about producer confidentiality in such a system, O'Brien says the way he envisions the system, this would not be an issue. "In my proposal, the only right the government would have would be to go in and trace a diseased animal in the event of an outbreak. And, if that happens, wouldn't it be better to be able to immediately pinpoint where the animal came from and where in the system it has been?"

The other common concern when it comes to blockchain is the $1 to $2 cost of the RFID tag. It's a nonissue, O'Brien insists.

"What no one wants to acknowledge is that with RFID, we open U.S. cattle to new export markets and new branding opportunities. If we're truly looking for transparency as opposed to mandates, this is where our leadership needs to be focused."

> Editor's Note: At this crucial time in the history of the American cattle producer, we encourage all to let their voices be heard. Contact your preferred representative organization, reach out to Sen. Charles Grassley's office, your representative, feeders and buyers. Tell those in power positions what you think and why.