Economists, Academics, Industry Agree: Supply, Demand, Labor, Economies of Scale Drive Beef and Cattle MarketsWednesday, July 28, 2021
WASHINGTON, DC – Two Congressional committees today held hearings looking at beef and cattle markets where Members of Congress heard testimony challenging misguided rhetoric about beef and cattle markets. Economists, academics and market participants presented careful analysis confirming recent market behavior is due to supply and demand fundamentals related to labor shortages, drought, and the cattle herd size and is not due to structure of the market. Most suggested that before inserting itself into the market, government needs to consider the long-term nature of the cattle market cycle and said policies and investments should be sustainable and responsive to consumer demand.
The following quotes are from recent Congressional hearings and news media publications:
On labor shortages:
“One of the biggest challenges facing existing operations is labor and meeting the labor needs. A facility doesn’t do any good if we don’t have the labor or the technology to put product through that facility.” Dr. Dustin Ahern, Vice President and Rabo Research Animal Protein Analyst, Rabo AgriFinance, Chesterfield, MO testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“I agree with what Dr. Ahern said earlier that what you really want to focus on is that effective capacity, that even if you have the buildings, you need the labor there. So in a way, labor acts as a constraint on capacity.” Dr. Jayson Lusk, Distinguished Professor and Head of the Department of Agricultural Economics, Purdue University, West Lafayette, testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
On government intervention:
“My recommendation to you, as policy makers, is the following: do not overly focus on what is happening today. Consider what will be needed 3 to 5 years from now. Market participants adapt to changing circumstances, although sometimes more slowly than we'd like because of biological and construction lags, but policy ideally should focus on longer-run forces that improve the well-being of producers and consumers in an industry.” Dr. Jayson Lusk testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“Discussions of cattle prices and packing capacity can give the impression that beef and cattle markets represent a zero-sum game. But, one party's gain does not have to come at the expense of another. What policies increase the size of the pie available to all participants: cow-calf producers, backgrounders, feedlots, packers, retailers, and ultimately, consumers? “Dr. Jayson Lusk testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“A note of caution. There is a point where industry capacity expansion goes too far to withstand cyclical periods of tight cattle supplies. The long-term cattle cycle, drought risks, and market fundamentals must be considered.” Dr. Dustin Ahern testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“But, going further and asking politicians to interfere with and or constrain an industry that efficiently and sustainably produces the most secure and affordable food supply in the world because packers are perceived as the roadblock to free markets is not the answer. I see the end result as a multitude of regulatory measures to redesign the industry toward some preconceived notion of ‘fairness.’ Free markets will become legislation driven by bureaucratic mandates and cattlemen won’t like it any more than packers.” John Nalivka, president, Sterling Marketing, Inc., Vale, Oregon op-ed in Drovers entitled, “Cattlemen! Be Careful What You Wish For!” https://www.drovers.com/opinion/nalivka-cattlemen-be-careful-what-you-wish
“Finally, it is my desire to indicate to this group as strongly as I possibly can, please do not create regulations and legislation that have the unintended consequence of harming value-based marketing. Doing so would undo many years of progress for producers such as my family and those of our customers. Onerous legislation has the potential to result in a reversal of quality that is simply unacceptable to consumers. Legislation limiting progress (and ultimately is a detriment to quality beef production) punishes America’s beef producers.” Mark Gardiner, President Gardiner Angus Ranch, testimony before the United States Senate Committee on Agriculture, Nutrition, & Forestry Hearing on “Examining Markets, Transparency, and Prices from Cattle Producer to Consumer”
On the cause of recent market behavior:
“The biology and natural time-delays of the beef industry make it slow moving and capital intensive. Adjustments take years. While recent, unforeseen events have exacerbated the situation, free market signals, economic losses, drought, and the natural cattle cycle laid the foundation for today's circumstances over several decades. Dr. Dustin Ahern testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“With any luck, we will work through the long tail of 2020's cattle backlog in Q3 2021. Year-over year cattle prices are already improving and should continue to do so through 2H 2021 and beyond. In conjunction with tightening cattle supplies, capacity expansion will come online over the next several years and new technologies will reduce labor constraints, further shifting margins to the benefit of cattle producers.” Dr. Dustin Ahern, testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
On Alternative Marketing Agreements (AMAs):
“Even if 100 percent of cattle were being sold on the cash market, it doesn’t mean prices would have been any higher than what we recently observed.” Dr. Jayson Lusk testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“Stated directly – without contemporary use of AMAs I believe cattle prices would be lower as production efforts would not align as well with consumer demands.” Glynn T. Tonsor Professor, Dept. of Agricultural Economics Kansas State University testimony before the United States Senate Committee on Agriculture, Nutrition, & Forestry Hearing on “Examining Markets, Transparency, and Prices from Cattle Producer to Consumer”
“Most crucially, it's not just about building facilities, it's about building a business model. Competing in commodity cattle markets against the efficiency of large, incumbent plants would be extremely difficult for a new entrant. However, if a new entrant can capitalize on a differentiated branding strategy, the premium component may be enough to offset efficiency disadvantages. Differentiated beef requires differentiated cattle. Alternative marketing agreements are the best way to secure a consistent supply of such differentiated cattle. Strong, vertical supply chain relationships will be critical to the success of any new beef business.” Dr. Dustin Ahern testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“Attempting to mandate more cattle be sold in a negotiated, cash basis has potential benefits and certain costs. The fact that most producers and packers choose to sell cattle using alternative marketing arrangements suggests they see benefits in this form of marketing in the form of increased certainty, lower transactions costs, and supply chain coordination. Mandating a certain percent of cattle be sold on a negotiated basis would entail some producers and packers foregoing a marketing method they currently find more desirable. That is a cost. Moreover, strengthening of consumer demand for beef over the past couple decades has occurred over a period in which there was increased use of formula pricing that rewarded quality improvements. Eroding the ability of consumers, retailers, and packers to incentivize quality through formulas and vertical coordination may have detrimental impacts on demand.” Dr. Jayson Lusk testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“AMA which are agreements that occur outside of the spot cash market. They really help to minimize supply chain risks, reduce marketing costs, increase capacity utilization both at the feedlot level and the packer level, so really what this does is reduce operational cost and operational risks which in turn filters down to being able to pay higher prices for cattle as it goes back to the cow calf sector.” Dr. Dustin Ahern testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
“It is important to understand packers did not force cattle feeders into Alternative Marketing Arrangements (AMAs). Producers were the brainchild of such ideas to get paid for the value produced. Value-based marketing systems are the ‘rising tide that lifts all boats.’ Mark Gardiner, President Gardiner Angus Ranch, testimony before the United States Senate Committee on Agriculture, Nutrition, & Forestry Hearing on “Examining Markets, Transparency, and Prices from Cattle Producer to Consumer”
“AMAs allow packers and cattle feeders to both reduce their supply chain risks, better manage inventory, better utilize cattle feeding and cattle processing capacity and reduce their marketing and procurement costs. Both of those sectors of the beef industry are margin operators, so the price that they are willing to pay for the upstream input into their production system is very much determined by what their operating costs are. If we increase operating costs at the packer level, packers are likely to pay less for fat cattle. If we reduce the price of fat cattle, and increase the operating costs of feedlots then they are likely to pay less for calves and feeder cattle. So I readily admit that price discovery is necessary, but we have to recognize that it does have a cost, and if we eliminate or reduce the benefits of AMA’s, that also has a cost and with cow calf producers being primary producers and not margin operators, they have no one else to pass on the burden of that cost.” Dr. Dustin Ahern testifying before the House Agriculture Committee Subcommittee on Livestock and Foreign Agriculture.
About North American Meat Institute
The North American Meat Institute is a leading voice for the meat and poultry industry. The Meat Institute’s members process the vast majority of U.S. beef, pork, lamb, and poultry, as well as manufactures the equipment and ingredients needed to produce safe, high quality meat and poultry products.share on facebook share on twitter