Produce is being left in the field. Dairy farmers have nowhere to send their milk, and cattle ranchers are hit hard by plummeting beef prices. These are just some of the problems caused by the coronavirus happening in farm country.
A surge in demand for beef may have emptied grocery store meat aisles, but supply is not an issue. Despite a rise in retail prices, the American Farm Bureau Federation (AFBF) reports prices paid to ranchers have fallen 25%.
This comes during a week when cattle producers will watch the markets to see if retail beef demand will continue its slow decline as consumers’ freezers are now packed with meat. Yet, there’s a discussion on market manipulation in the industry and if there’s a need for an investigation.
We’ve all seen the bare beef aisle at the grocery store, but that heavy demand is slowing.
“We have been trying to restock people’s freezers,” says Arlan Suderman, chief economies economist of INTL FC Stone. “That is starting to slow down now.”
The industry knows that demand at the supermarket is slowing down, too. The evidence is found in the price of the average choice cutouts.
“It appears they’ve peaked now, and they’re going to be working their way down,” says Derrell Peel with Oklahoma State University Extension.
Retail beef demand remains very strong compared to previous months. It’s a problem some in the cattle industry are upset about when they see such a high retail demand while futures prices are low. Most live cattle contracts are trading under a buck.
“We ended up hitting decade contract lows,” says Casey Schuhmacher, a Chadron, Neb., cattle producer.
As of March 20, the daily choice box beef cutout was roughly $253, more than $45 higher compared to the previous Friday. A week later, that price was less than a dollar. Late last week, the choice cutout dropped significantly to between $230 and $235. The daily spot choice box beef cutout ended the week on Friday, April 3, at $230. It was roughly $22 lower. However, it’s not near as low as it was several weeks ago.
The packers get a big chunk of the spread instead of cow-calf producers and feed yard operators.
Some private companies estimate the margins of how much money packers are receiving. Michael Nepveux, an economist with AFBF looked at some of those private estimates.
“They were sitting around $521 per thousand pounds of steer [for part of last week],” says Nepveux. “As of February 16, they were sitting at $217.”
Nepveux says the beef retailers sale on a typical day is product the retailer planned sales around as many as three months before, but packers are still making big money.
“I think we’re highlighting some problems with the number of captive cattle in the market,” says Schuhmacher. “We’re really having a hard time closing that gap between boxed beef prices and live cattle [futures].”
It’s the second time in a year the cattle industry has seen a tumble in its market. Some companies, like Tyson, gave cattle sellers a premium for one week during March to help.
“We definitely hear a lot from our cattle producers [and] some frustrations, especially when the cash and futures markets are not acting in a similar manner,” says Nepveux. “Right now, that’s just historic cutout levels. Even with the backslide [last week], it’s still higher than what it was during the Tyson fire.”
Colin Woodall, CEO of the National Cattlemen’s Beef Association (NCBA), believes an investigation could be roped into the Tyson fire investigation, which is still open as well.
Woodall says, “It’s been our experience that if we can fix it ourselves, it’s always much more palatable than any sort of government fix placed upon us. Does something need to give? Does something need to be fixed? Absolutely. We believe in that, but we really want to be able to do that on our own.”
As far as boxed beef margins, Woodall says NCBA contacted packers about the situation.
“We made phone calls directly to the packers, and we made very clear expectations to them that we wanted them to be aggressive in the market and aggressive in their bidding,” says Woodall. “Some bids were higher than what the futures prices were telling them they should have been bidding.”
Yet, there’s more to the situation. Some say the market did what it had to do during the COVID 19 pandemic.
Others say it’s not illegal for the packers to make more money, since they are a customer of the producer.
However, some in the industry say the feed yards that hedge, and recognize when to hedge, have had a chance for profits.
“You can take some market protection risks off the table to being hedged in the event the market goes from $1.25 to $.98 like it has,” says Narciso Perez, chief of cattle feeding operations with Zia Agricultural Consulting.
The situation is also complex when it comes to the CME Group. Some feel changes should be made to the CME live cattle futures markets in an effort to make sure futures stay closer to the cash price.
No matter the stance, the situation is sure to be watched by all facets of the industry as the year progresses.