Jun 5, 2009
COMMENTS No new law

This past week was a real lesson in the volatility of our cattle markets. Feeder cattle contracts took a beating, with the August contract taking nearly a $4 hit while chasing live cattle contracts down to new lows. I suppose there were some expectations that the market would be softer after Memorial Day, but still, no one likes seeing the market go down, especially when one of the season’s first big video sales is ready to take place.

The first day of Superior Livestock Auction’s Corn Belt Classic sale, feeder cattle were down the limit of $3 and the sale wasn’t that good on Tuesday.

There were more no-sales than normal. Despite this decline in the futures markets, there were many fall delivery contracts on feeder cattle and calves made at relatively good prices.

Many cattlemen have learned to use these video auctions as an effective forward pricing tool. Covering your cattle with an option contract is also a viable tool and with today’s market volatility, it seems it’s worth learning how to use them properly.

Having a multitude of methods to market your cattle and protect your risk is a sign of a healthy marketing system. A little extra work on preconditioning, or targeting your cattle for a natural or non-hormone treated program, source- and age-verified, or a specific breed-type program can pay some decent dividends. We have to be honest with ourselves and admit these markets weren’t available 15 years ago. With the variety of marketing programs available, it’s puzzling why some cattle groups insist that markets are unfair. A couple weeks ago, Sen. Mike Enzi, R-WY, sponsored the Livestock Marketing Fairness Act to legislatively change some aspects of livestock marketing. The usual cast of supporting senators were co-sponsors of this short-sighted legislation that seeks to change the 90-year-old Packers and Stockyards Act. The legislation deals specifically with the fed cattle markets and the large packers. Small packers and co-ops are exempted from the legislation. This is a highly targeted law that focuses on the four major packers who buy and process nearly 80 percent of the fed cattle available. This is extreme and reminds me of the recent congressional effort to control CEO compensation in large corporations. It would result in more micro-managing by the government.

The act intends to dictate some of the terms of how forward contracts are written by establishing a firm base price and requiring purchase and delivery to take place within a specific amount of time, among other items. Of course, it also would attempt to eliminate packer ownership or control of cattle and seek more transparency on the issue of when and how contracts are made. There is no denying that the packing industry has seen a great deal of concentration. Cattle feeders have learned that the best way to deal with packer consolidation is with more consolidation.

Ironically, consolidation is a fairly normal part of any business cycle. The livestock industry is a maturing industry and production contracts are now commonplace. There are examples of this everywhere you look. Take the hog industry, as an example. Yes, there are fewer hog operations than there were 30 years ago. Roughly 10 percent of hog operations remain from the numbers that existed in 1980. The concentration was in response to efficiency and consistency and the high-cost producers eventually lost their place in the industry. Both pork and poultry are very consistent products and are delivered at a relatively low price because of production efficiencies.

And, frankly, the beef industry has had a difficult time competing with them. As always, rewards go to the low-cost producer in any market.

What perplexes me is that the support for this legislation is primarily from cow/calf organizations. Cattle feeding organizations don’t appear to support this legislation in any way. Cattle feeders were the group that actually started the practice of forward contracting fed cattle to packers and did so for many economic reasons.

The question I have for the cattle industry is this: How much government do you want in your business? As far as I’m concerned, the less the better. If there is a big problem with forward contracts with packers, the industry should deal with it on their own so it can control the process. Once it becomes a law, and the government is involved, you lose control. I know that no one in the cattle industry wants less control over their business. — PETE CROW