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Let’s talk about the real problems with our market

Article-Let’s talk about the real problems with our market

Burt Rutherford Loading out fed cattle
Reduced packing capacity is a boon to the packing industry and a disaster for the cow-calf industry.

It is difficult to make the case that all this market volatility is really reducing risk, but I’m a contrarian at heart. Consider these points:

Certainly, these unprecedented levels of volatility give us ample pricing opportunity on both the buy and sell side and that is a good thing. Secondly, the computers and their fancy algorithms may be able to handle $6 moves in two days, but humans who are still pulling the trigger when these commodities are changing hands simply don’t process those kind of price swings.

We have simply become numb. Just this last week we saw futures rally, and then move sharply lower and it had absolutely no effect on feeder cattle prices in the country.

You could almost argue that the volatility in the futures has relegated it to what it was intended to be, which is a risk management tool. Its role in price discovery is diminishing with every gyration, at least in terms of short-term price discovery.

The days are largely over of the packer driving onto a feedyard and saying the board is down $.50 so you are going to have to take less, or a rancher thinking that feeder cattle futures are up $1 so calf prices should be higher. Those things simply don’t have the impact they once did. Or we have come to understand and accept that the market will not perform as it has in the past, and are adapting to those changes.

Like soldiers who no longer flinch at the sound of gunfire or explosions, there is a tendency emerging where we don’t overreact to what is happening in futures market on a day-to-day basis. The futures market’s wild gyrations are perhaps a minor concern in the long run.

And that brings us to consider other factors, like packing capacity.

The real question we have going into the fall is not so much the futures market, beef demand or even supply. Feedyards have reacted to strong markets by aggressively marketing finished cattle and pulling more feeders into their pens. That affects when fed cattle will be ready, but does not affect total placements. However, we do have a slight increase in available supplies as well.

That, in and of itself, is not an unmanageable concern. After all, we have moved far more tonnage and numbers in the past. Unfortunately, that is not the case now.

Last fall’s precipitous decline in prices has been explained away largely as an overreaction to the psychology of fear, significant losses in the feeding sector, abnormally performing futures, etc. It was supposed to be a perfect storm and largely an anomaly.

Yet, a big part of last fall’s collapse was simply that we had insufficient packing capacity to handle the increase in the nation’s cattle herd. When we were blessed with packing overcapacity, large placements or fluctuations in the supply could be handled easily. We now live in a world where current slaughter capacity is deficient for the numbers we are projected to produce.  

R-CALF and others have been proven wrong, and the economists and mainstream industry correct: reduced packing capacity is a boon to the packing industry and a disaster for the cow-calf industry. There is no relief in sight and expansion will likely stop; not because of supply outstripping demand, but rather supply outstripping capacity.

Now, R-CALF is trying to shut down the checkoff through legal means and destroy our only capability to maintain and increase beef demand. Admittedly, though, hurting beef demand will alleviate the packing capacity concerns. The take-away is that they are largely irrelevant and have to use anti-industry money via the courts or other means to even have an impact. 

They have come to that strategy because they have been unable to have an impact in the halls of Congress or out in the country. Thus, they have turned to anti-beef industry groups for help. They may not be worthy of mention because of their minimal impact, yet small extremist organizations like R-CALF and OCM can’t be measured by their successes or number of people they represent, but rather by the negative impact they create.

By that standard, they occasionally deserve to be called out, and it is valid to ask who is funding these organizations? We know it is not cattlemen. 

TAGS: Marketing
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