Cattle Industry Waiting on DOJ Report – DTN

Mike Schultz, a western Kansas cow-calf producer and chair of R-CALF USA’s committee to re-establish country-of-origin labeling, sees too much timidness right now among cattlemen’s groups and policymakers when it comes to dealing with unfair cattle markets.

“There are a lot of things that aren’t being addressed right now,” Schultz said. But, he added, “There’s also a lot of fear of retaliation for cattle feeders if they say something.”

With just four major packers controlling more than 80% of the fed-cattle market, Schultz said independent cattle feeders cannot afford to have a buyer stop offering bids.

ANTITRUST CONCERNS

Pointing to the frustration of producers in his state, Iowa GOP Sen. Chuck Grassley told reporters this week he is working with Sen. Dick Durbin, D-Ill., chair of the Senate Judiciary Committee, and Sen. Amy Klobuchar, D-Minn., who chairs the antitrust subcommittee, about holding a hearing specifically on some cattle market issues.

“We’ve seen four beef packing companies making significant profits at the expense of U.S. beef consumers and independent cattle producers,” Grassley said. “These powerful companies have limited competition and it’s our responsibility to hold congressional hearings.”

The Big Four beef packers include Tyson Foods, JBS, Cargill, and National Beef. Tyson and JBS, both public companies, recently reported strong quarterly profits in their beef sectors due to high demand. Cargill and National Beef are private companies and do not release income information.

A hearing on dominance by four packers would bring attention to the situation for urban senators who do not pay as much attention to agriculture, Grassley said. A hearing would also include some direct questions for packers themselves.

“We’re going to be able to ask them how come they can make hundreds of millions of dollars when maybe the farmer’s making a few dollars or maybe even losing money.” He added, “I suppose most of them are losing money, the independent producers.”

Sen. John Thune, R-S.D., on Wednesday also sent his own letter to Durbin calling for a hearing. Thune then spoke on the Senate floor about efforts to press the Department of Justice for details on its investigation. “The gulf between rancher and meatpacker profits and the significant power these companies have over the beef industry has raised concerns that we’re looking at something more than just an issue of supply and demand,” Thune said.

At least 16 members of Congress last week wrote the Justice Department asking for an update on its investigation, which began last year.

WAITING ON DOJ

Ethan Lane, vice president of government affairs for the National Cattlemen’s Beef Association, said NCBA supports the senators’ push for DOJ to release its findings of the investigation that has now gone on for a full year. The Department of Justice conducted a lot of interviews and investigators visited cattle producers as part of that process, Lane said. Now cattle producers and lawmakers would like to know what DOJ discovered.

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“That’s where our focus is on the antitrust component at the moment,” Lane said. “We’re a year into a DOJ investigation that we requested amongst other groups at the height of the market failures last spring and we don’t have a readout yet. Let’s wrap it up and see what they found out.”

DOJ issued subpoenas to the four major packers a year ago. In its annual report, Tyson Foods stated the company received a civil investigation demand from the DOJ Antitrust Division on May 22, 2020. The request demanded information related to fed cattle and packing plants.

Lane said it’s not sustainable for cattle producers to continue facing adverse market conditions while everyone else in the supply chain is making money.

“If there is anti-competitive behavior in the marketplace, we need to know about it, and we need to be able to engage there,” Lane said.

Oklahoma Gov. Kevin Stitt also wrote a letter to U.S. Attorney General Merrick Garland expressing support for continued investigation into cattle markets. “The substantial margins between the live cattle prices our ranchers receive and the retail prices consumers pay at the grocery store are a continuing source of concern and frustration for Oklahoma’s beef industry.” Stitt’s letter also added, “The significant concerns of our cattle industry stem from the historical consolidation of meat processing companies in the U.S. and the minimal competition that exists in this sector of the beef supply chain today.”

The Justice Department declined to comment to DTN on the status of its investigation.

PRICE REPORTING

A reauthorization of the Livestock Mandatory Price Reporting Act is also set to expire again at the end of September after Congress extended the law last year. Neither the House nor the Senate have held hearings on possible changes to the reporting act, which requires packers to report their purchases. Cattle groups have a host of proposed changes they would like to see to the price-reporting requirements for packers.

Grassley noted, “That’s the drum I beat” in terms of getting his colleagues to examine the packer concentration issues. He and Sen. Jon Tester, D-Mont., proposed a bill last year that would require packers to buy 50% of their cattle on negotiated cash-trade sales, less than 14 days before slaughter.

NCBA has opposed bills seeking to establish a mandated cash market. The group continues to analyze negotiated cash trade to see whether there is a voluntary solution to improve the cash market without looking for a regulatory or legislative solution. But if improvements do not occur in certain parts of the country where negotiated trade is weak, then NCBA will look at revising its policies.

“No one in the cattle industry can say with the straight face that there isn’t some disagreement on cattle marketing,” Lane said. “That’s obviously one of the most contentious topics out there. And certainly, NCBA has affiliates throughout the country with wildly disparate views on the issue. Our task as a national trade association is to keep those different viewpoints talking and working through those issues and trying to find some common ground as an industry and that’s what we intend to keep doing.”

As part of the price-reporting reauthorization, NCBA also wants to see a cattle contract library that would allow for more transparency on how formulated and grid transactions work between feeders and packers. Right now, most details from formula contracts are not transparent in the market. “Producers that are not benefiting from those now might be interested to see how to increase their negotiating position with the packers when they can see what other people are doing and what’s working for them,” Lane said. “That’s been our focus in this space.”

A TOUGHER STANCE

Schultz saw little accomplished in a recent meeting in Phoenix, Arizona, among several organizations including NCBA, R-CALF USA, the U.S. Cattlemen’s Association, National Farmers Union, American Farm Bureau Federation. The meeting was set up by the Livestock Marketing Association. The groups came out of the meeting calling for the results of the DOJ investigation and wanting to see the price-reporting act renewed.

A more serious move, Schultz said, would be to require packers to report all their cattle buys and get rid of the 3-70-20 rule USDA uses with price reporting now. Under current price-reporting rules, USDA has detailed limits on how price reports are handled. At least three reporting entities (packers) must provide at least 50% of their purchases over the most recent 60 days, but no single packer may provide more than 70% of the data used for a report over that time. And no single entity (packer) may be the sole entity for an individual report more than 20% of the time.

“A real solution would be, if it sells, report it,” Schultz said. “Get rid of the 3-70-20 rule when we are down to just two packers majority controlled in the U.S.”

Another simple solution would also push packers to increase their negotiated cash market buys, Schultz said. “We need to ban packer ownership,” he said. “Why do the packers have to own one single calf?”

CME BOXED BEEF INDEX

For now, cattle producers are facing higher feed costs with the spike in grain prices and are putting a lot of cattle on feed compared to a year ago. With 2020 numbers almost noncomparable because of COVID-19 market disruptions, the 11.7 million head on feed reported for May is just slightly lower than 2019, but also still the second-highest inventory on May 1 since USDA began releasing monthly reports in 1996. So, it’s a buyer’s market when it comes to cattle.

“I was on a call with one of our state executives and in a buyer’s market like this, it’s just fish in a barrel,” Lane said. “They have a ton of cattle and they have finite and actually diminished capacity because of some of their labor issues.”

Since the spreads between cash prices, live cattle futures and boxed beef prices widened, one possible industry solution is a futures contract on boxed beef. In March, CME released the Boxed Beef Index, a five-business day, volume-weighted measurement of the daily Choice and Select Cutout prices, using USDA pricing data. The index, with access to CME’s portal, right now provides another way to look at the cutout prices, but it’s not a tradable product.

When CME rolled out the Boxed Beef Index, it was touted as a way to help producers better manage their risk with the comparisons of the rolling average of Choice and Select prices for the week. “This will allow the customer to better monitor the spread differential between fed cattle and the finished product,” said Tim Andriesen, managing director of Ag Products at CME Group, when announcing the index.

In the two months since CME rolled out the Boxed Beef Index, the Choice cutout value has gone from $227.09 on March 10 to $329.92 on May 25, an increase of 31%. The Select cutout has moved from $220.42 to $304.26.

Since March 10, June live cattle futures have fallen 2.5%, going from $119 per cwt to $116 per cwt on May 25, though the June contract did touch a high of $125 in early April before starting a steady decline.

If the June live cattle futures were tracking with the Choice cutout, its price would be close to $156 per cwt.

As far as trading a boxed beef futures contract, it could take some time. CME released a Pork Cutout Index in 2015, then rolled out a futures contract based on that index last November. On its website, CME states it is “possible down the road,” that the Boxed Beef Index becomes a trading product, but as of now “we have not made any decisions to launch a tradable contract at this time.” (See here)

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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