030158 Packer-Controlled Meat Supply Distorts Prices?

Kansas City - Claiming packer-owned and controlled meat supplies have led to price distortions and an uncompetitive market for fed cattle, David Kruse, president of CommStock investments Inc., and a livestock market analyst, also said there is no reward to consumers for the low prices producers receive.

Kruse was speaking to the fourth annual convention of R-CALF United Stockgrowers of America, a relatively new cattle producers organization that is gaining in popularity among independent cattle producers and feeders.

Beef pricing is changing for the consumer, he said. Where grocers once tracked the cost of beef up and down, which gave producers an incentive to grow or reduce their herds, prices now are left relatively stable at whatever the market will bear.

That allows the grocer to reap the profits if cattle and beef prices go down and gives no market signals for change back to the producer.

The old 10- to 11-year cattle cycle, linked to herd size, is still evident in the feeder cattle market, Kruse said.

Feeder cattle are younger cattle that enter feed lots. After spending about 4- 6 months in these lots, they emerge as fed cattle.

Kruse credited the continued competitive nature of the feeder cattle industry for continuing the cycle. Feeder cattle are often sold at auction and aren't under contract to anyone in the next layer of the production pipeline.

However, that isn't the case with fed cattle, he said. The cattle cycle in this sector of the production line is absent because of the loss of competitive price discovery.

Cites Pork Industry Trends

Kruse looked at the pork industry as an example of what could happen to the beef industry if the trend toward more and more contracting with the packer is allowed to continue.

By helping aspiring hog producers get into the hog production business, banks and packers have enhanced the long-term supply of hogs, he said. This leads to a fear that space at the packing plant won't be available to the producer, which leads to increased contracting to secure this space to finance the debt.

November price data compiled and converted by University of Missouri agricultural economists Glenn Grimes and Ron Plain showed the average net live negotiated price for hogs was $29.52 a hundredweight, compared with a formulated price of $30.96 and a futures-based formula of $29.48 and long-term purchase agreements (probably ledger contracts) was $39.53.

Kruse said the difference between the negotiated price and the formula price may be the result of a larger percentage of lower-quality hogs in the negotiated category because they don't fit the packer's formula specifications.

The cattle market can expect no better, he said. In fact, the disconnect has been happening since about 1993 when contracting became more active. At the same time, packer margins began to rise sharply, to an estimated $145.20 a head in 2001, while live cattle prices shrunk or held steady, coming in at $72.21 a hundredweight in 2001.

Kruse quoted Robert Peterson, the former chief executive of IBP, in a speech he made to the Kansas Livestock Association in 1988.

"Our competitors are promoting contracts and seeking more. These forward contracts coupled with packer feeding could represent a significant percentage of fed cattle at certain times of the year. Do you think this has any impact on the price of the cash market? You bet! We believe a significant impact. Large- volume forward contracting and its inevitable connection to the futures trading pit in Chicago will foster severe price distortions in the cash market. In the event that contracting becomes the wave of the future, and frankly, I doubt that sharp (cattle) feeders will allow that to happen, IBP will be forced to respond to the competitive pressures of the market place."

Kruse supported a ban on packer control of livestock as a way of gaining back the competitive nature of livestock markets. In written commentary accompanying his speech, he said it would do cattlemen more good than the beef checkoff and country-of- origin labeling.

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