The Moos Room™

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[cow moos]
Joe: Hey everybody, it's Dr. Joe again. Thank you for tuning into The Moos Room. Got a special episode today where we again have Angie Ford and Eric Mosel on today to talk about beef markets, what we saw in Kansas in August with the fire at the packing plant, and what we're seeing now with COVID-19. We're going to talk specifically about how the market's acting and why it's doing what it's doing, and potentially, what these situations have exposed that's wrong with the market. Just in case you didn't get a chance to tune in last week, Angie Ford is a feedlot producer in Southwest Minnesota, where she is also the Region 7 director of the Minnesota State Cattlemen's Association.
On top of all that, she's a registered nurse. We know she's busy, and I really appreciate her time coming on the podcast and willing to give us some insight into what she's seeing. Eric doesn't need a whole lot of introduction, but Eric Mosel is an extension educator for the University of Minnesota up in the Grand Rapids area. He is our resident cow-calf and grazing expert. He's a cow-calf producer himself. He has skin in the game, definitely knows what he's talking about. Eric is from Nebraska, so you'll hear him complain every once in a while about winter, but that's okay. We forgive him for it. I hope you guys enjoy this episode. There's a lot of great information here today. Thank you again for listening.
Welcome back to The Moos Room. We're joined again this week by Eric Mosel and Angie Ford. Completely different topic this week. We finished up our three-part grazing episode last week, and this week we are talking about something more current event style, talking about the beef market and some issues that we've been seeing lately. If anybody doesn't know, back in August, we had a fire in a packing plant in Holcomb, Kansas. Some of the issues that we're seeing now were also seen then. Angie, you probably have a pretty good idea of what happens and what happens to the market following this fire at one of our bigger package in Kansas. Can you give us a little overview on what happened there?
Angie: Sure. It was back at the beginning of August, Tyson Beef down in Holcomb, Kansas had a fire. It was a relatively small fire. It was contained to a single room, but they did have some heat and smoke damage to their kill floor, so they had to shut down. Everything that they had in there, they had to get rid of because of smoke damage. They had to start rebuilding it obviously right away. After that, they claimed that because of the lack of capacity for killing cattle with one plant going down, that suddenly we had a huge bottleneck and we couldn't expand our packing industry.
The cattle that typically were harvested there had to be diverted to other plants throughout the United States. Then other plants decided to add on Saturday and Sunday shifts to try to make up for what this one plant was currently killing. We realize in a big hurry how vital that our packing plants really were, and we're seeing that again now today with the COVID scare because the packing plants are shutting down or slowing down because of not only illness but also because of people not coming into work because of the fear of getting it.
Joe: The situation was very unfortunate in Kansas, and it did expose some things as far as capacity and things like that. The real reason we're talking about it, I think, is because of how upset producers got with what happened with the market following that fire. Eric, can you give us a brief summary of why producers were so upset?
Eric: Well, it was for a variety of reasons, but I think you can base a lot of it on incomplete information because, for the average Joe that was watching the thing, the two weeks after the fire, they killed more cattle than what they were killing when that plant was on board. A lot of people got really upset that you have all this excess capacity, but you're claiming there's a bottleneck and this, and that, and the other.
What they didn't know was like Angie said, well, they were running extra shifts, they were running on weekends, they were hiring more people, they were doing this, that, and the other, which they normally didn't do. There's two sides of the story. Anytime there's a big shakeup in any market, there's going to be some blowback on whatever the processor does.
Joe: Prices went down, right, for the cattle.
Eric: Well, they tanked.
Joe: They tanked. Did we ever get that back? Did it ever really recover?
Eric: Yes, it did, but it took basically till January to really get back to where it was.
Joe: We were coming back all the way to January, and markets were trending upwards, things were looking pretty good.
Eric: Things were looking really strong, especially in the nearby fat market, they were looking really good. The nearby feeder market was looking really good. A little bit further out, there was some softness. The fundamentals were aligning the need for more beef was going to be pretty good.
Joe: Well, obviously, we all know that COVID happened, and everyone panicked. What happened to the market, Angie, when COVID hit?
Angie: Well, we had a massive run to the grocery store for beef and toilet paper, apparently. What that did is it just wiped the shelves of beef. There was a huge rush of ordering from retail from the packer to get that replenished for the consumer, mind you, at the same time, restaurants, schools, that kind of thing are either shut down or on minimal with just takeout delivery. There wasn't a huge demand for restaurant quality cuts at the same time.
The boxed beef price went through the roof to the retailer, and the consumer, of course, paid a little bit more as well. The live cattle on the hook price was drove way down, way down, and the futures market as well was falling, and there was no stopping it. It seemed like every day, everything was going down when it came to the futures. The disparity between the boxed beef price and the live cattle price is what a lot of cattle producers are currently wanting answers for and demanding to know how can this happen not once, but now twice.
Joe: Let's put some numbers on that. If you guys have the numbers. Eric, you probably have the numbers as far as what were packers making during that period per head versus what people selling cattle per head. What were they losing, or making, or staying even? How was that all working out?
Eric: Well, live cattle were selling for about $1.20-ish when things really started to go south. I don't really have any inside knowledge as to what packers were making. It was probably somewhere around $50 to $70 a head. I'm just guessing.
Joe: This was before COVID, right?
Angie: Before COVID.
Eric: Yes, and then within a matter of weeks, well, maybe a month, both the feeders and the fats lost about 30% of their value on the board, on the futures market. Now, it was a little bit of a strange deal because on the feeders, the cash price did not immediately follow the futures market into the toilet. In fact, the cash market stayed pretty strong until about the middle of March, and then finally they started to converge, especially as we got close to the end of the March contract. Live cattle have been much more erratic.
When the futures started dropping, the live prices dropped pretty significantly as well. Then they bounced back. Just from what I've seen, they stayed in the $1.09 to $1.15 range for a while, even though the futures market had gone well below a dollar. Is the cash fats going to converge with the futures more than it has? I don't really know what will happen there. I suspect probably not. Just the value of boxed beef right now should add some strength, at least to the cash market. I'm suspecting, but who knows?
Joe: Go ahead, Emily.
Emily: All right. Related to that and just thinking of supply and how that's impacting price and all these kinds of things. Similarly, on the dairy side, we saw this huge disruption in the market and in the food supply chain, and now recovering from that too. I have heard that some beef producers are also upset because right now the market's also getting flooded with dairy farmers culling cows. For various reasons, they're doing this but do you see that that really-- Is it making as big of an impact as some people say it is? I feel like cull cows have always been a factor in the beef markets. Just curious what your thoughts are on that or what you've seen or heard.
Eric: I'll let Angie start.
Angie: Well, for a while there, there was a week where the cow price was actually very good. Very, very good. This was right when everything was starting to clear the shelves of toilet paper because ground beef of course is the first thing that moms were buying in the grocery store because it's easy and relatively inexpensive. There was a rush on cows actually for just that reason to replenish that.
Then, like I said, after the mass panic went through with the buying of all the extra meat and everybody fell down a little bit, there's been this bottleneck situation going on now and there wasn't really a whole lot of cow sales going on the following week because of that. If you had cows to sell, you really had a grand opportunity to get a little money out of them before this but it's such uncharted territory right now with nobody really being able to predict how it's going to go because it seems like nothing is like it's ever been before. What you think is up is currently sideways. It's hard to predict how these trends are moving.
Joe: Angie, I know you started to say earlier, and I could sense a little bit of your frustration with all of this. As a feedlot operator, as a feeder, why were you so upset with the current situation with the disparity? What about it made you upset?
Angie: Well, there was quite a gap in boxed beef versus cash price. When that did rocket through the roof to retailers, I actually had businesses calling me asking how can we change this disparity and why is the boxed beef price up another how many dollars. On our end, in the cattle we're going down, anybody would wonder, "Gee, if you put a quarter in the system and it comes out as a $50 bill, why am I the only one that gets the quarter? What's the problem with why am I not getting a part of the end product price?" That is the frustration is it seems to be the beginner producer into the system that is not getting the cut that is coming out at the end.
There's just got to be some change to the whole system, I think, to get that straightened out and going in the right direction. It's always been there, but this has just flared the fire per se of the problem and more people are aware of it, I guess because it's been talked about at length in many, many circles.
Joe: To me, I think the big frustration that I see is that normal laws of supply and demand don't seem to apply. The demand is high, the supply is there and the price is there at the end, but it hasn't trickled back to anybody who's producing the live cattle.
Angie: Correct.
Joe: I think that's huge and I think part of it comes into the futures market because that tanking and how that futures market price is determined plays a big part in it. I know Eric, we had talked about it in a different Zoom meeting since we're all having these Zoom meetings lately about how is that futures market really determined. Why is it not influenced by current cash market?
Eric: It's mostly witchcraft and sorcery. The futures market is, in my mind, inherently flawed because on any contract you've got buyers and sellers on both sides of the contract. If you want to buy into the contract, you've got to have a seller on the opposite side. Well, what happens in these big runs on the futures market is you've got everybody that wants to sell, but there's nobody on the buy side. What that does is if there's nobody on the buy side, then people get stuck in these sell positions, and that accelerates the drive to the bottom.
Which is why we always see whenever there's a sell-off, the line goes straight down. Then as it recovers, it's more of a flat increase. It's because when there's panic in the market, you got to look at, "Okay, well, who are the sellers on the futures market?" In the normal market, it's largely producers and not necessarily farmers and ranchers, but just anybody who has cattle to sell, whoever that is. The people on the buy side are going to be some producers that are hedging having to buy that product but a lot of it is institutional investors.
What happens is when there's a panic in the market, all of the institutional investors immediately jump out. Now, they don't necessarily convert over to the sell side, they're just out. Now you have nobody in a long position, and so the short positions can't get out of their position and so the market just falls like a rock.
Joe: That makes sense. It's so complicated this whole process. I'm convinced that people that know how to hedge and know how to hedge well, regardless of what commodity you're using, are infinitely more smart than I am because I've never been able to figure it out entirely.
Angie: I have likened it before to being taught how to gamble pretty much. Learning how to hedge is basically, learning how to professionally gamble.
Joe: Can you operate the craps table or not? I think you guys have put a good frame around why people are upset and what's going on. What I always like to do in a situation like this to check myself, is to talk about the other side of the coin. What's happening with the packer? What challenges are happening there that could also explain some of what's going on or how things are working? Angie, do you have any insight into that? Are there challenges that the packer's facing right now that could maybe explain this bottleneck and give us some answers from their end?
Angie: Well, yes, and I alluded to that before. Labor has always been an issue with the packing industry even before the COVID virus has arrived. If you tour any packing plant and ask them what their [unintelligible 00:17:24] rate is, you would be astonished at the number that they give you. I was very surprised myself. Obviously, labor is a huge issue right now. If you think about it, look at the illness that they're having go through. I've just seen Pennsylvania is shutting down their packing plants because of the illness.
Locally, Sioux Falls, which is a pork-producing, not beef-producing plant, they're shutting down now because they had 80 workers came in with COVID that they know of, which obviously could be much higher. We have to really look at, from that standpoint that they just aren't having the manpower to process these cattle. The cattle are there, and that's not the problem. There's plenty of cattle that need to be processed, but it's just the labor part of it to get it done currently is what the issue was.
Last week after the huge rush on the retail side, there was no retail orders. Everybody was full. You know what I mean? They really didn't have anywhere to go with it either. Mind you, they have a large cold storage situation. I'm sure they could funnel some out too, but I think the biggest thing right now is the labor workforce. If it's not an illness, there's also some union trying to get their workers a little bit more money out of this deal and trying to organize that a little bit, which makes things a little hairy too but I think it's going to come down to just plain old labor and being able to keep the doors open when it comes to the packing industry right now.
Joe: Yes, and I think that's an issue in a lot of different industries. I don't know if Brad has seen anything like that on the dairy side yet. Have you really seen any labor issues yet?
Brad: Not really. Not that we've heard of anyways.
Joe: Okay. Well, I'm sure it's something that we all need to be prepared for clearly causing an issue on the packing side. Now, we're going to look big picture. This whole system, we can't just throw it out. We're stuck with some pieces of it. That's just not how our country works, how our system works. You can't just throw the whole thing out and start over. We'll start with Eric. Do you guys have potential solutions to our current system? Is there something that you can think of that would solve this or is it just so complex that we don't really know?
Eric: Well, it's not really that complex, but you've got two things that set price that have nothing to do with each other. You've got perception and you've got reality. In the futures market is the perception, and the cash price is the reality. How do you get those two things to align? You don't. Could be some possibilities of requiring futures to be corrected by the cash market. I think electronic trading of futures always created humongous problems ever since it started, and I think it needs to be abolished. That's fine in the stock market. That is not okay in the commodities market.
Largely, those are band-aids. It's difficult in my mind to see even why, well, let's just stick with cattle, why cattle would be traded on the board. We'd be much better served with some type of price insurance program rather than this nonsense that happens on the board of trade because that doesn't really serve anybody except the institutional investors.
Joe: Something more like having an insurance program like we see on the dairy side is what you're talking about.
Eric: Yes. Beef has a small insurance program through RMA. It's totally inadequate and not practical for larger producers, but some smaller producers can take advantage of it. It's modeled more off of crop insurance. I'm not saying it's a good system or that's the system that we should use but some type of price insurance system would be much more useful. For people on the production side, I've been using hedging and options for years, and it's a crapshoot whether it really helps you all that much or not. If there's a catastrophe, it's definitely worth it.
There are some real fallacies in the system too. The other thing is if we maintain our current system with the futures market, then maybe we need some type of basis insurance program or something like that. That's where a lot of people get burned is on the basis. There are some remedies that could help, but they're all really just band-aids compared to the rut of the issue, in my opinion.
Joe: Thank you, Eric. I know that that's a big question to ask you. It's your turn, Angie. Do you have anything for us on the solution side?
Angie: Well, let me see. If I had a magic wand and was queen for a day, I'd like to see some more cash-negotiated trade with our market. Pretty much up here in the northern area, we're about the only cash-negotiated trade. The further South you go, the less you get. A lot of southern [unintelligible 00:22:55] contract formula [unintelligible 00:22:57] cattle, and they base basically what they're getting off of what we're getting. My feeling is if we can get some more negotiated cash trade, we could definitely leverage ourself a little better, but how do you do that? Some producers think, "Hey, we could do this by ourselves."
Some people want the government to step in and help us out, but how many people like it when the government says, "Hey, I'm here to help you," because sometimes their help is worse than the problem that you currently have? There's quite a few ideas I've been floating around and how to get this cash trade worked up. One of them is through the mandatory price reporting that we currently have in place already, and they're looking at trying to use that tool to prove that they're buying a certain percentage of the cattle cash tree.
I think the number that I've heard floating around is 30% they'd like to see, and then they would have to report it that way. You could do it pretty easily, all those steps are already in place as far as the packer having to report those things. I guess we also just need to focus on demand. Get the word out that US beef is the best there is, and trade foreign and domestic. Hands down, we have the best beef in the world, and people want it so let's get it out there and get it to the people.
Joe: I think we recognized before all of this hit that export markets are a huge opportunity, and it's only become more and more apparent that US beef is the best beef in the world, especially with how efficiently we produce it. When we talk about sustainability, the environment, land stewardship, all those things, there's no one that does it better than us. I think as this all blows over and we try to get out of this, I hope some of these things get fixed and we don't just pass them by and then wait for this to happen again. Hopefully, people can stay on it.
I hope today everyone got something out of this episode, very sensitive subject for a lot of you out there and I think we addressed it well and everyone managed to stay fairly calm and not too emotional about everything. I appreciate everybody out there listening. Thank you again to you Eric Mosel and Angie Ford for being here. Really appreciate their time. We're going to wrap it there because I'm sure you guys are sick of listening to me rattle on. If you need more information, need something to reference, go to extension.umn.edu. If you have questions for us, comments, things you want to hear, email them to themoosroom@umn.edu. That's T-H-E-M-O-O-S-R-O-O-M@umn.edu. Thanks for listening. Catch you next week.
Angie: Oh, I really wanted to say [unintelligible 00:25:54]
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