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Ranchers’ Ire at ‘Red-Line Level’ as Packers Pocket Beef Profits

·6 min read

(Bloomberg) -- Rising anger among cattle producers and consumers as retail beef prices surge is building political momentum in Washington for greater scrutiny of the four companies that dominate the meatpacking industry.

Ranchers and cattle feeders are seething over a pattern they now consider all-too-familiar: The cost of hamburgers and steaks is soaring at the grocery store, yet the prices producers get for the animals barely budges.

“It’s a red-line level of frustration,” said Colin Woodall, chief executive officer of the National Cattlemen’s Beef Association, the largest trade association for cattle producers.

The struggle over cattle markets is playing out just as antitrust and competition issues gain new traction in Washington, where a backlash against Big Tech is fueling broader concerns about corporate behemoths abusing dominant positions. Four companies together control more than 80% of U.S. beef processing.

The Biden administration views the pricing patterns in beef processing as evidence that concentration is having damaging effects on the supply chain and rural America, a senior U.S. Department of Agriculture official said on condition of anonymity. USDA officials are looking at ways to use their regulatory authority to reduce the imbalance in market power, the official said.

Six farm and cattle trade groups this week united behind demands for meatpackers to disclose more information on cattle purchases, and for the Justice Department to publicly report on an antitrust investigation it launched last May into the four major beef processors. Sixteen members of Congress wrote the Justice Department the same day pressing for a progress report on the probe.

Rural senators are torching meat companies. “Consumers are paying premium prices” but “only lining the pockets of BIG CATTLE & not helping the independent producer,” Iowa’s Chuck Grassley, a Republican, tweeted Thursday. South Dakota’s John Thune, the No. 2-ranking Senate Republican, said there are “two losers in the cattle market right now: ranchers and consumers.”

Two bills have been introduced in Congress to require more transparency in pricing and terms of cattle purchases, in the hopes that it will give producers more leverage in transactions. Republican Senator Deb Fischer of Nebraska, who sponsored one, said she is “very optimistic” some version of an enhanced disclosure bill will pass this year.

Lawmakers representing rural areas are sensitive to cattle producers’ pain. Beef cattle operations account for more than a third of U.S. farms and ranches, making it the single largest segment in the nation’s agriculture. Ranchers are also hurting from an expanding drought. Feedlot operators, who typically fatten cattle before they go to packers for slaughter, face soaring corn prices.

“At home, I hear about it all the time,” said Fischer, who described encounters with cattle feedlot operators losing hundreds of dollars per animal. “You can’t stay in business with those kind of losses.”

Meanwhile, packers are prospering. Tyson Foods Inc., the largest U.S. meat company, earlier this month reported record margins of 11% for beef in its second quarter. The company’s stock is up 22% so far this year, compared to 9% for the benchmark S&P 500 index.

The stunning beef profit margins will eventually decline but remain above historical levels, Tyson’s Chief Executive Officer Dean Banks said at a conference Wednesday.

With pandemic restrictions easing, restaurants are reopening and buying meat. Flush with stimulus payments and improving incomes from a recovering economy, Americans have been willing to pay up for more expensive steaks and burgers.

Since March 12, the wholesale price of beef has shot up 43%, according to USDA. Cattle prices have risen only 5%.

Producers see a rerun of their plight during Covid-19 disruptions last year, when virus outbreaks slowed slaughterhouses, and the prior year, when a fire temporarily shut down a meat plant in Holcomb, Kansas, said Woodall. Each time, beef prices soared while cattle prices dropped.

Renee Strickland, a fourth-generation cattle rancher based in Myakka City, Florida, said she sometimes has to pass up beef for chicken at the grocery store because it’s too expensive for her.

“I’m just so angry that I can’t afford the product that I produce,” she said.

The spread between the price packers pay for cattle and the price they receive for wholesale beef keeps hitting new records, first following the August 2019 fire, and then after the pandemic hit. A USDA report that examined beefpacker margins reached no conclusion on whether prices were manipulated.

Greg Ibach, the undersecretary of agriculture in the Trump administration who oversaw livestock market regulation, said markets never really returned to normal levels after the Holcomb fire. In the year prior to the Aug. 9, 2019 fire, packers’ operating margins on cattle averaged $137 a head. Since then, it has averaged $331 a head, according to data maintained by HedgersEdge.com.

“It never really has corrected itself,” Ibach said. “I don’t think the profits are being shared across the value chain in the same proportions that historically has happened.”

Meatpacking companies say they’re constrained and struggling to attract workers, particularly after the Covid-19 outbreaks that made the industry an early epicenter of the pandemic. Tyson executives said this month they’ve raised wages but still face high employee turnover and absenteeism.

“Despite the pandemic’s challenges the market is competitive and growing,” said Sarah Little, a spokeswoman for the North American Meat Institute, a trade group, in a statement.

There are nascent efforts to boost U.S. beef processing capacity. Marfrig Global Foods SA in March said its subsidiary National Beef Packing Company is spending $100 million to more than double capacity at its plant in Tama, Iowa, to 2,500 cattle daily by adding a second production shift. The changes will be done by late 2022, and there are other smaller plants in the works.

The Agriculture Department also is planning to use some funds from the Biden administration’s $1.9 trillion rescue plan to help small- and medium-sized meat processors expand operations, possibly using loan guarantees or grants.

“There’s an opportunity for us to support additional processing capacity and hopefully a more competitive market,” Agriculture Secretary Tom Vilsack said.

Tough times on the ranch also have an impact over time. Ironically, the cattle market is sending producers the exact opposite signal that economic textbooks would predict when consumer prices are rising for beef.

That means the supply imbalance currently boosting packers will peak in 2021 and should eventually give more bargaining power to feedlots, according to Glynn Tonsor, agriculture economics professor at Kansas State University.

“Both of those adjustments will improve the relationship in favor of the cattle seller,” Tonsor said of more capacity and a decline in herds. “We’ll see more second shifts, more new plants and fewer cattle.”

(Adds tweet from Senator Thune)

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