Since the fall of 2019, beef packer profits have received major attention by ranchers and feedyards. Much of the discussion started after the packing plant fire in Kansas, but has exploded recently due to the results of the COVID-19 pandemic. Packers have struggled to stay online due to COVID-19 cases related to the plant, and the industry has lost food service which as struck supply chains hard, complicated by consumers hoarded product from the grocery store.
This week President Donald Trump announced, “I’ve asked the Justice Department to look into it. … I’ve asked them to take a very serious look into it, because it shouldn’t be happening that way and we want to protect our farmers.” There are questions regarding the teeth of this investigation, however.
Prior to 2016, beef packer margins floated between -$20 and $20 consistently, but that has changed. During this current period of packer capacity restriction due to COVID-19 that +/- $20 has ballooned to over $700.
Historically speaking (see left), from 2015 through 2019 the choice cutout was in a range of $180 to $265. The high during that period was reached in the spring of 2015.
In 2020 (see right), the choice cutout has spiked to levels never seen before, all because of packers facing slaughter capacity issues and consumer hoarding.
While the beef cutout has risen, live cattle prices have fallen 14% year to date.
This market dynamic has frustrated beef producers tremendously, as packers have seen lofty spreads between the choice cutout and farm gate prices.
Although there is lots of push for packer margin regulation, a deeper conversation on the “how” is not as widely discussed. If the the conversation on packer margin regulation becomes more tangible what would it actually look like?
Some producers believe that the cash price should be tied to the boxed beef price or there should be a bust up of the consolidation at the packer level. Others think a cap on gross profit per unit would work. All of these have their downside risks for the producer, though too.
In Canada, railways are regulated on revenue, banks face rules, and airlines were recently handed a passenger bill of rights. Are packers next?