Investigation into Market Collapse

by | Apr 10, 2020 | 0 comments

In an April 8 tweet, U.S. Secretary of Agriculture Sonny Perdue announced that the Packers and Stockyards Administration would be investigating beef and cattle pricing activity during the COVID-19 pandemic.

“@USDA’s Packers and Stockyards Division will be extending our oversight to determine the causes of divergence between box and live beef prices, beginning with the Holcomb Fire in KS last summer and now with COVID-19,” was the secretary’s tweet.

North Dakota Stockmen’s Association Executive Julie Ellingson said her organization has been diligently seeking results from the Holcomb fire investigation and will now be looking forward with anticipation to the results of the additional inquiry.

“We’ve been calling (P and S) consistently to see what they’re coming up with,” she said. NCBA, the national organization that her group is affiliated with, also asked USDA to investigate the current market volatility, “in the hope of identifying whether inappropriate influence occurred in the markets, and to provide our industry with recommendations on how we can update cattle markets to ensure they are equipped to function within today’s market realities,” said the NCBA president in a letter to President Trump.

The industry has supported a closer look into the “incredible market situations” and the “terrible situation” that livestock producers are in, not only last summer and fall, but more recently, too, she said.

R-CALF USA Region VII director and cattle feeder from Moville Iowa, Eric Nelson, is also cautiously optimistic that the investigation will turn up something useful.

“It’s great that they are doing that but here we are eight months after the Holcomb fire, and…nothing,” he said, regarding the investigation that P and S is conducting to determine if illegal anticompetitive buying and selling took place immediately following the beef plant fire in Kansas in August of 2019.

“So they are going to start another investigation now…hopefully they don’t kick the can down the road eight more months.”

Nelson said the cattle feeding economic situation has been dire for months if not years. While he normally feeds around 2,500 head of cattle, he only bought about half that many through the summer and fall of 2019 because he couldn’t pencil a profit on most feeder cattle offered for sale. Even while cow-calf producers were selling calves in a troubled market, the low calf prices weren’t low enough to create a profit situation.

Most of the cattle he buys come from Montana – he made the difficult decision not to purchase a set of calves from one ranch who he’s bought from for 35 years straight.

“There are a lot of cattle that at best will be break even, if they are hedged,” he said of cattle currently in finishing lots. Nelson said feeders marketing finished cattle right now – the market as of April 9 was about $104 per hundredweight – that aren’t hedged will likely not be able to pay any of the feed bill, and will be fortunate to pay off the cattle loan with the money they receive for their fat cattle.”

The value of a finished steer in early January was about $124 per hundred weight, expected to climb to around $130 by April or May.

The current market environment equates to $300 less per critter that feeders will get, than they were expecting three months ago.

Nelson’s Montana salebarn contact told him mostly corporate feeders are buying cattle now, and it’s Nelson’s belief that certain of those feeders are able to keep their heads above water because of bonus payments they receive from the packers.

Nelson understands that the bonus payments are often made to certain of the bigger feeders to secure a steady supply of cattle and prevent the packers from having to deal in the cash market. These payments may not be reflected in USDA pricing reports. Nelson points out that with only one or two corporate feeders bidding on calves, the true value of the calves may not be realized.

Ellingson hopes a P and S investigation will shed some light on items that need to be worked on, she said, realizing that the investigation is just one tool for the industry to use as it seeks answers.

“We hope that this can shine a bright light on whether or not there was any illegal activity and whether there are gaps in the system. We know the whole marketing issue and price discovery is an incredible topic we’ve all been grappling with,” she said, adding that she hopes a P and S report could help identify areas of improvement to help fortify the cattle business in the state and country.

Some groups, including the Nebraska Cattlemen’s Association, are calling for a Department of Justice investigation into “fraudulent business practices within the beef meatpacking industry” in addition to the P and S investigation.

Groups are also discussing how best to utilize the $9.5 billion allocated to agriculture through the CARES Act.

President Trump tweeted April 9, “@realDonaldTrump; I have directed @SecretarySonny to expedite help to our farmers, especially to the smaller farmers who are hurting right now. I expect Secretary Purdue to use all of the funds and authorities at his disposal to make sure that our food supply is stable, strong, and safe….We will always be there for our Great Farmers, Cattlemen, Ranchers, and Producers!”

The NDSA published a news release with several bulleted ideas for USDA to consider when determining how to distribute the $9.5 billion directed to farmers and ranchers in the Coronavirus Aid, Relief and Economic Security (CARES) Act.

They asked that the packing segment of the industry not receive any relief funds, but that all other segments be considered, as long as they are within the United States. No foreign entities should receive payments. Ellingson said they particularly wanted to be sure that cow-calf producers weren’t lost in the shuffle, as many of them won’t be marketing significant numbers of cattle until this fall or later.

“Those losses are still ahead,” she said of cattle producers.

The subsidy program should not encourage inefficiencies or overproduction, NDSA said.

NDSA said three classes of cattle – cows, feeder cattle and fed cattle – should be considered in the dispensation of the funds.

The payments should be capped at $250,000.

As an industry for which there is no federal “safety net,” and is the largest segment of the agricultural industry, the cattle industry should be considered a priority when USDA determines how to dole out the funds, said NDSA.

R-CALF USA also offered suggestions for the CARES funding allocation:

The group said the assistance should go to producers of U.S. born and raised cattle and sheep and not to those who sell livestock of foreign origin.

“In relation to feeders, only those exposed to moves in cash cattle prices should receive assistance. Those shielded by such market moves through preferential payments (such as any payment not reported by packers under Livestock Mandatory Price Reporting at the time the cattle were sold) should be excluded,” the R-CALF USA letter states.

The R-CALF USA letter also cautioned that U.S. cattle and sheep producers do not want to fall into a non-competitive cycle where both buyers and sellers rely on taxpayer dollars to subsidize their incomes.

According to its news release, the group offers a unique recommendation, urging the Secretary to focus assistance on the ability of cattle and sheep producers to maintain both preexisting financial obligations and their current financial needs for maintaining financially viable operations. Included in this suggestion were proposals for loan payment waivers and even loan forgiveness in some instances.

In addition to discussion of the CARES act and the secretary’s investigation announcement, several organizations publicized media releases calling for mandatory cash purchasing of fat cattle.

The NCBA letter to President Trump requests the Commodity Futures Trading Commission to study the influence of speculators on live and feeder cattle futures contracts to determine whether these contracts remain a useful risk-management tool for cattle producers.

The Nebraska Cattlemen and R-CALF USA are both asking that packers be required to buy at least 50 percent of their kill on the cash market.

Other groups including the US Cattlemen’s Association are asking for a mandatory 30 percent cash market purchase requirement for packers, and a 14 day or less delivery window.

Article originally published in Tri-State Livestock News, April 10, 2020.


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How did we get here?

From the Holcomb Tyson fire to COVID-19;
Click to see a timeline of events that have brought to light the profit and pricing disparity in cattle markets.


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