“Quit Your Whining” – Economists to Cattle Ranchers
Author, Farmer, and Economist Michael Smith briefly talking returns to Cattle Ranchers and profits to meat processors and retail.
The beef industry is under fire, we’ve been seeing this for years. We first saw where Smithfield has taken over whole towns for pork production, vertically integrating as much as possible, even to take a cut of the feed grain market in those towns. This provides the blueprint for a bigger industry, beef.
Matt Stoller is Research Director for the American Economic Liberties Project, his piece gets into the grit of it:
Economists to Cattle Ranchers: Stop Being So Emotional About the Monopolies Devouring Your Family Businesses,” BIG News Letter by Matt Stoller (substack.com)
A few takeaways:
“Higher meat prices are responsible for roughly half the annual increase in food prices, and food inflation is not only stretching household budgets, but has created a serious political problem for the White House. In September, the Biden administration attacked the industry over high prices, calling for an end to “pandemic profiteering.”
“Grassley’s chokepoint comment is right; for every dollar Americans spend on food, only 14.3 cents goes to the farmer. And much of the rest of it goes to the middlemen. JBS, for instance, paid out a record $2.3 billion in dividends in 2020, and plans to increase that by 75% this year.”
Yet we see higher prices at the grocery store. The processors and retailers Cargill and Kroger, respectively) dominate the pricing game. But there are new disparities in the economics.
“To cattle ranchers, who actually sell the cows to packers that are turned into beef, the crisis is not high prices, but low prices. They aren’t getting very much for their cattle. This is weird, because, normally, beef and cattle prices move in tandem – the current high beef prices should result in high cattle prices.”
Margin spread over the past few years and the divergence:
Should, but now doesn’t. There isn’t another opportunity for ranches to sell and make a decent return on investment and these companies know this. The monopolistic charm is pushing production prices to the floor. Once bankrupted, Cargill can hope to mop up assets at fire sale prices and vertically integrate the front end of the process with their back end.
The opposition, however is a bunch of well connected land owners and a powerful lobbying group called the National Cattlemens Beef Association, or the Cattlemen for short. There are actually more than just the Cattlemens Association going after this issue, which is probably why Secretary Vilsack has been pushing middle market solutions.
U.S. Ag Secretary Vilsack to Focus on Building Markets | Main Edition | lancasterfarming.com
Mr. Stoller smells reform in the air, and Chuck Grassley seems to be championing the cause, with multiple efforts by ranchers to out wind in the sails. We are about to see a showdown over the Wests most iconic industry.
This has been an ongoing battle for farmers trying to level the playing field in cattle farming. If you are doing anything less than 500 head of cattle, your costs of bring cattle to market is higher than those who have the land to sustain large herds. Some cattlemen and women have resorted to boutique cattle raining and meat processing offering a limited-private meat supply to people who can take on a large quantity or go in with others.
This is not the first time economists got involved.
In 1981. A group of Chicago School economists and lawyers working in the Reagan administration introduced a new interpretation of antitrust laws. Traditionally, the goal of antitrust legislation had been to promote competition by weighing various political, social, and economic factors.
Under Reagan, the Department of Justice narrowed the scope of those laws to promote primarily “consumer welfare,” based on “efficiency considerations.” In other words, the point of antitrust law would no longer be to promote competition by maintaining open markets; it was, at least in theory, to increase our access to cheap goods. Though disguised as an arcane legal revision, this shift was radical. It ushered in a wave of mergers that, throughout the course of the following decades, would transform agriculture markets.
Rather than promote efficiencies leading to lower pricing, the result was consolidation of meat processing and a decrease in the numbers of smaller farmers.
Under Obama in the first two years, efforts were made to improve competition. “The administration also consulted experts like Taylor, the professor at Auburn University. At one point, the USDA sent an entire team of economists and lawyers to Alabama with a full day’s worth of questions. “It was clear these were conscientious, committed officials who had spent a lot of care investigating the issues,” Taylor said.”
The USDA also began to address Congress’s 2008 Farm Bill instruction that the department revise and update elements of the Packers and Stockyards Act. By midsummer, the USDA had rolled out a series of far-reaching revisions, addressing many of the farmers’ concerns.
After the 2010 election, this all changed as Republican teabaggers came ito power in the House and opposed the Obama administration efforts to reform. In the end, efforts to reform fell to the wayside.
Matt’s piece identifies economists support for few and large processing meat packers which under the right controls “could” deliver greater efficiency. Since Reagan, it has not worked out in such a manner and few cattle ranchers have the size of the power to oppose one much less the four of them.
Here again economists argued against Congress influencing the industry;
“economists argued that the cattle ranchers had it all wrong. The Big Four were large, but that size was merely a result of superior productive efficiency. And while cash markets were much more limited than they had been, prices were still determined solely by the impersonal forces of supply and demand, not market rigging. Moreover, these economists issued a serious warning to members of Congress considering reform. Any policy action would cut into this efficient system, and “produce numerous and detrimental unintended consequences,” especially to the naïve cattle ranchers asking for the government to step in.”
As Michael points out less and less money goes to the cattle rancher, the balance of which remains with the corporate meat processing and packer industry . . . a government sponsored monopoly operating in unison.
This has been the issue for all sectors of our economy. I know you recall the cry: Economies of Scale”. The slick phrase that camouflaged what the desired out come was: monopoly/oligopoly.
All of it driven by the financial sector’s wanting to be the board of directors, CEO and Comptrollers of our economy. Basically making finance primary to all other activity.
What gets me about this excuse for why consolidation happened is it completely ignores that a lot (dare I suggest most) consolidation happened at a time when our companies within an industry were rich on the equity side of their balance sheets. Boards voted to sell as they were cashing out for the good life. Greenmail, raiders, venture capitalist, holding companies, etc. were all part of it.
It was the remodeling our economy from the perspective those who earned money from money. And it was all nonsense born of selfishness. Selfishness covers over much flawed reasoning for it narrows the view.
That fatal human flaw, thinking that one’s life experience is all life’s experience.
https://www.wowt.com/2021/10/16/ranchers-beef-industry-plotting-open-their-own-slaughterhouses/
We can go around them, here is one instance.
Riding the Green River Drift, a cattle drive.
Riding along on the Green River Drift, the longest-running cattle drive left in America (msn.com)
Thought you would like this.
Stopped eating beef about ten years ago. Problem solved.
Not necessarily. We still use beef industry byproducts to grow fruits veggies. We use blood, bones, urea, manure from cattle. We use propane, plastics, and fertilizer derived from oil and gas. Organic farming and Korean Natural Farming involve organics and other nonsustainable things. Marking it as, “I don’t eat meat, therefore it can’t be a problem” is only seeing the tip of the ice berg. Everyone likes heated leather seats, shoes, belts, pillows, soap, etc. It all has to come from somewhere.
No we don’t have to raise beef on an industrial scale to have these things and no I don’t like leather for shoes or seats or belts or anything else.
Same here. We occasionally eat ground bison, but mostly Incredible burgers when we want burgers. Otherwise, fish, poultry and vegetarian. It isn’t hard. Nobody is compelled to eat beef. Next up is insects. Disgusted? What do you think shrimp, crabs and lobster are? Sea bugs.
joel:
Roasted grasshopper in Thailand is a street-buy.
It has been like this for chicken farmers even longer. Basically, a chicken farmer is an employee who is given newly hatched chicks and told to deliver them when they reach a certain size. The employees have to provide an approved facility, buy approved feed products and so on. They have as much independence as an Uber driver who was forced to take out a loan to buy a Rolls Royce.
I’d say something about chickens coming home to roost, but the empire may yet strike back.
Haha yes. This is spot on. And also why chicken at the farmers markets are getting $5 a pound. Folks realize the unsavory facts/plight of the chicken farmer and also pork producer. Scaling up is the biggest headache. Anyone got a chicken plucker?
Yep chicken is even worse although there is some ethically produced chicken out there if you are willing to pay for it. I come from a ranching family so this based on a lifetime of observing the industry. I no longer eat anything that cries when you take its babies away. Lived through enough gathers to know that rules out beef.
The model of operation being discussed here is infecting all aspects of our economy. Here is a good article regarding the trucking industry.
How Lease Deals Have Truckers Hauling a Load of Debt
Daniel:
This “it benefits in several ways by converting company employees into supposedly independent contractors. The shift saves money on health and retirement benefits, workers’ comp and unemployment insurance, cutting as much as 30 percent in labor costs.”
Those are Overhead Costs and not Labor Costs as Accountants would claim. Why is it Overhead? It is the law to pay for Unemployment, SS, Workman’s Comp, etc. While it is not the law to have healthcare, try hiring someone when the other company has healthcare. A cost of doing business.
And this “The capital and operating costs of the truck — depreciation, maintenance, insurance and so on — are now the driver’s headache.” is just another shift of cost to an individual who does not have the economies of scale a company has.
Do you know how many times I have argued this? I was a consultant for a medium size firm and we knew this to be true. We can not impact some things and other things slightly. If you want lower Labor costs improve throughput.
By the way, this is Michael Smith’s post.
The capital and operating costs of the truck — depreciation, maintenance, insurance and so on — are now the driver’s headache.