“As we work through the escalating trade tensions that are currently roiling markets, it will be beneficial if all sides remember that trade adds value and is not a zero-sum game.”
That’s the bottom line of market comments made by Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, as simmering trade tensions between the U.S. and China seemed set to boil the second week of April. Whether or not the tariff tiff continues, Peel’s point serves as a timely reminder.
Simplistically, a zero-sum game is one in which the only way I can win is if you lose, or vice versa. And the win on one side equals exactly the loss on the other. We wager $5 on the results of flipping a coin, for instance.
Too often, cattle business transactions are viewed as a zero-sum game. If fed cattle bring $2 less this week, we tend to think the seller lost $2 and the buyer gained $2.
That ignores all sorts of things, from opportunity and transaction costs to the fact that without a packer, there would be no buyer of fed cattle, so there would be no feedlot buyer of calves and feeders. Without cattle to feed and harvest, there would be no feedlots or packers. It’s a complex non-zero-sum game, in which the survival of the players is interdependent, with varying degrees of give-and-take advantage along the way.
Consequently, recent results from an investigation into the behavior of fed cattle prices for 2013-16 are unsurprising.
Crumbling prices in the fall of 2015 prompted some in the industry to ask for the investigation, which was conducted by USDA’s General Accounting Office (GAO). At the time, there was chatter about falling prices being due to everything from imported cattle and beef to packer collusion.
Instead — commonly recognized at the time and proven with the benefit of history — it was basic fundamentals, perhaps skewed a bit by other things like algorithmic trading, international currency markets and the like.
The GAO report says as much.
“Our review identified several supply and demand factors — such as a prolonged drought that affected the price of cattle feed and the availability of relatively less expensive protein substitutes such as pork —that affected changes in fed cattle prices from 2013 through 2016,” according to the report.
“Furthermore, we found that varying competition levels among packers did not appear to explain the large national price changes, but may have contributed to variations in fed cattle prices in different areas of the country.”
As you’ll recall, years of drought and nascent herd expansion continued to limit calf and feeder cattle supplies, fueling historically high prices for much of 2015. Then cattle prices fell hard beneath the burden of increasing carcass weights, due to delayed feedlot marketing, which was tied to economic losses at feedlot level, as well as the high cost of feedlot replacements.
Domestic demand was sputtering with price-weary consumers. International beef demand was challenged by the surge in global supplies, the higher U.S. dollar and volatility associated with China’s currency devaluation that summer. All the while, markets were adjusting to the reality of an expanding cow herd for the first time in a couple of decades.
In 2016, demand began to perk up, the global protein glut eased, cattle feeders got current and were pulling cattle ahead by the end of the year, leading to reduced carcass weights and beef tonnage relative to cattle numbers. Markets began drifting back to what many considered normal conditions.
As Peel points out, trade is not a zero-sum game.