Posted on February 16, 2024 by Krissa Welshans
Source: Farm Progress. The original article is posted here.
“Competition is at the very center of everything that happens in the cattle arena, from top to bottom,” Tupper said. “A free market system only works with true and transparent price discovery and competition at all levels.”
Unfortunately, the U.S. is losing small auction markets all across rural America. For example, where Tupper grew up in Kimball, S.D., there were 11 sales barns in a 100-mile radius in 1991. That same 100-mile radius today has only five sale barns.
Why is this important? “When we have 11 sale barns competing each and every day for those producers, that’s what’s going to keep the price as high as it possibly can be,” Tupper explained. “That works in an up market, and that works in a down market.”
With less competition, there is less incentive to get top dollar, he explained.
The U.S. Department of Agriculture’s recently released Ag Census confirmed the number of beef producers is declining as well. Since 2017, the U.S. has lost 17% of producers that raise 1-2,500 head of cattle. The number of operations that raise 2,500 head and above, on the other hand, has increased 6%.
That decline, Tupper said, means a loss of competitive edge.
The decline carries over to the backgrounding and stocker sector, and the feedlot sector has also been consolidating, with more “corporate” feedlots, Tupper noted.
Many of these feedyards, he said, have alternative marketing agreements (AMA) with just one packer. “So, if they have 50,000 head, all of them are going to one packer. That is a huge advantage for the packer no matter what the market is,” he said.
The Consolidated Appropriations Act of 2022 directed USDA’s Agricultural Marketing Service (AMS) to create a Cattle Contracts Library Pilot Program to increase market transparency for cattle producer by providing the cattle and beef sectors with information about contract terms offered by packers to producers. While the program has been helpful, Tupper said confidentiality rules have limited the information available and prevented the ability to assess the whole picture.
“So, the small farmer, rancher or feedlot that just feeds a few and can’t even get a packer to bid on his cattle has no idea if that big corporate feedyard is getting $5 over the weighted average or what he’s getting for that commitment to all of those cattle going to that packer.”
This has to “open up,” Tupper suggested. “We have to be able to see, if we want our industry to continue and flourish.”
Even the packing sector has lost small and regional operations. “Each and every time this happens, we lose competition,” he said.
In 1974, Tupper said there were over 1,000 processing plants slaughtering more than 1,000 head per day. In 2022, that number was 242 facilities. These facilities are bigger and slaughter more cattle.
On top of the evolving cattle sector landscape, how cattle are sold has changed, too. In the 1970s, Tupper said most cattle were sold live. “If you had better cattle, you got a better price for them.”
Somewhere along the way, however, it was determined grid prices were better. “That took the onus off of the packer and put it back on the producer to produce those kinds of cattle,” he explained.
Today, about 80% of the cattle are sold in some type of AMA, whether it be a grid or contract situation. That leaves the other 15-20% to be sold in the spot cash market.
Adding to the complexity of the situation, producers in the South largely use contracts, while producers in the North still heavily utilize the spot cash market, Tupper explained.
In January this year, negotiated trade hit a record low, and just this week, negotiated cash trade was 23% lower than the same time last year, which was also lower then.
Tupper said 85% of the cattle are sold to four main packers, and most of the time, only one or two of them are competing or bidding. Many times, it’s only one, “so there’s actually no competition or anybody bidding.”
From top to bottom, the cattle sector has been losing ground. “We must defend competition and transparency. If we want this industry to survive, we must also defend the opportunities for the small family farms, the same of those large corporate feedyards.”
Tupper says we don’t need an overhaul or a big change, “but we do need a referee in the game to keep a level playing field from ranch to feedlot, with competition being a key factor for all segments.”
Tupper suggests the main four packers want to eliminate competition because it will allow them to take a bigger piece of the pie: “That’s simple economics.”
He further suggested that the current situation is no different from when the government had to break up “Big Oil” or Ma Bell. “Those are huge lifts, but they’re things we have to think about when it gets so big that there are no other ways to do it,” he added.
Efforts to increase competition
The Biden Administration has announced funding and initiatives to encourage small and medium-sized processing plants to come on line not only to increase competition but also to strengthen the resilience of the U.S. supply chain. However, American Farm Bureau Federation economist Bernt Nelson questioned whether this capacity will actually be used, even if it is available, and whether the tightening cattle supply may put those new plants at risk.
He also suggested that the main four packers may be bringing some of that new capacity on, as well. “Would that actually introduce competition, or would it reduce it?”
If any of these plants aren’t sustainable, Nelson continued, “Who is going to purchase them?”
Tupper also argued that even if more processing plants are available, getting market share for products at retailers is highly competitive. “When those big four packers have 85% shares today, they’re not going to give it up willingly. They’re going to fight tooth and nail,” he said.
Additionally, the current economic environment means it is more expensive to bring plants on line and more costly to run them once they are on line.
Nelson called for the sector to unite and work together. “Solutions to concentration and competition have to be a unifying concept in order to keep our farmers farming and keep the U.S. livestock sector a competitor in both our domestic and global markets, because once we lose that market share, it is a very difficult road to getting it back.”