By: Steve Cornett, Beef Today Read the latest blog from Steve Cornett.
Get Better or Get Out
Jun 27, 2011Competition is a frustrating thing. Still, there is a difference between war and business deals. In both, you have two sides. But only in one is “all fair,” and that’s because when you’re at war anything that hurts the adversary helps you. But in business, as often as not, the opposite is true.
As a buyer in a deal, I want my seller to make a profit so he’ll keep producing. As a seller, I want the buyer’s profit to allow him to pay fair prices.
Obvious, but largely missing from some of the rhetoric about industry structure and GIPSA’s proposed rule. Packers and cattle feeders, like cattle feeders and ranchers, are adversaries only once in the lifetime of a steer. At sale time, the one wants all the steer he can get for the money and the other wants all the money he can get for the steer.
That is an adversarial position. It does not, however, make the different actors in the beef business “adversaries.” On the contrary. Everybody has an interest in a more efficient, more profitable cattle business.
When I’m bidding on your feeder calves, I base the price I’ll pay on these variables: the price I can expect (or, more often, hope) to get and how much it costs me to turn your feeder calf into a fed steer. The higher the former and lower the latter, the more I’ll pay you. If corn goes up, your price goes down.
That means you, as the calf producer, have a vested interest in my success. You want me to get more and you want me to have to spend less. Because the more jam I get, the thicker you can spread your bread.
We all understand that, don’t we?
So why do so many of us not understand the same is true of fed cattle and packers? Granted, we need a fair market. We need to know that packers are playing by the rules. But absent of strong evidence—missing from all the studies on the matter—that they aren’t playing fair, we are spitting on our own faces to treat them as an enemy; to just presume that anything that hurts them helps us,
We do want things to be above-board. And, in that we’ve allowed four packers to pretty well control the cattle business, we should be willing to consider asking them to play a little like other players with outsized input in a market.
The question is how much do we want to hamper them? How much cost can we afford to add to their expenses? How much should we limit their management flexibility in hopes of getting a “fairer” market?
That strikes me as a Solomonesque challenge. Fairness is a very slick pig.
Fairness aside, one thing is for sure. Those who are putting their faith in this GIPSA rule to stop structural trends in the cattle industry are due for disappointment. Whether the rule is adopted or not.
At the supporters’ press conference last week, Mabel Dobbs, a part-time rancher from Weisner, ID, and chair of the Western Organization of Resource Councils, spoke for a large constituency when she said, “I came into this fight for fair prices as a banker and rancher’s wife running a thousand head of cattle. Today, I am in this fight as a grandmother, still wanting fair prices so my twin granddaughters can hopefully continue to ranch. That dream was ripped out from under us when unfair practices by the meat packers created volatility in the market and contributed to the loss of our ranches. We came back, on a smaller scale and with the help of an off-ranch income. Twenty plus years later, there is still no fair cattle market in which to participate. “
Without knowing how she believes “volatility in the market” drove her out of a ranch, and not wanting to cast any disparagement her direction, let me suggest that what we’re seeing is not just the “big getting bigger.” It’s the better getting bigger. The rest of us are getting smaller or getting out.
Wal-Mart and Costco and the other big players are squeezing the Tysons and Cargills and forcing them to, in turn, squeeze us. Our margins go down, our inflation-adjusted prices go down and the best and luckiest among us get bigger so they can continue to make a living wage. In the good old days, you could support a family on a hundred head cow herd. Don’t try it now.
There are many reasons behind all that, not the least of which is technology that allows single corporations to manage outfits as big as a Wal-Mart. Once they get that big—which they do by delivering value to customers—they have the power to force all sorts of pressures. Those pressures show up in the store as cheap Wranglers, Chinese-made American flags and cheap beef.
You can see from packers’ profit margins that they aren’t the problem here. Every time somebody at R-Calf wants to talk about this, they talk about farm to retail spreads. But when you break it down, most of the increase in those spreads have come at the retail level. That should give you a good idea of where the market leverage lies.
Packers’ margins have not appreciated significantly on a percentage basis—despite the fact that they are doing much more about beef marketing and beef safety than they did 20 years ago. They were under a 10% markup 20 years ago and they still usually are.
They didn’t take the market over by design. They simply did a better job than their adversaries in a tough business. They didn’t get bigger buying cattle cheaper than their competition—the market is the market, and certainly was when the consolidation occurred. They processed cheaper and/or marketed better. Their competitors just couldn’t do the job as well.
This is not a beef problem. It’s happening to everything from chicken eggs to clothes to televisions and, believe it or not, oil producers. Higher prices are not a cure-all for consolidation. Higher prices just let the better producers pay more to get bigger.
Consider this graph as a rebuttal to the argument that low prices have driven the much-cited disappearance of X-thousand farmers and ranchers from the business over the last X number of decades:
Sorry, Mabel. But the reason cattle producers are disappearing has much less to do with packers than with the way the economy is changing the business climate.
You’re not going to stop those mega-trends by picking on one little participant like meat processors. What you might do is add to their costs of doing business and thus force them to try to either force Wal-Mart to pay more or force feeders to sell cheaper. You already know who’s going to win that tug-off.
The beef industry has lost nearly 20 lbs. of per capita consumption since about the time of Ms. Dodd’s problem. That’s not volatility, it’s a steady decline
At the same time increased efficiency has allowed us to produce more—more—beef with fewer and fewer cattle and fewer and fewer producers.
So, go head if you must and adopt your GIPSA rule. Take out all Ms. Dobbs’ frustrations on the packers. The packers will adjust, just like GIPSA says they will. They will continue to thrive.
Just don’t expect it to have any positive impact on consolidation at the production level. The better will continue getting better and bigger.The bad news here is that the government isn’t going to save you. You’re going to have to recognize the real problem and adjust your operation to it. Change the saying at your place to this: “Get better or get out.”
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Just a couple of comments. One for you Steve, you are not a true rancher anymore. You are just another part timer like 89% of all farmers and ranchers, like me, who by the last statistics I heard had a outside source of income. You are now a commentator first and cattleman second I sure look forward to the day when all of our doctors are working part time so we can afford healthcare. From reading you over the last several years you seem to find this an acceptable solution, or at least you find that for cattle. Secondly, you have over simplified the correlation of the price of land to what is happening in the cattle and other farm markets. Here in Montana all land is either priced for view shed and/or recreation. This is very apparent by looking at who the biggest land owners are, and then looking at the type of cattle they run or do not run, several properties have been bought to remove cattle. Most of the largest land owners are not buying the land for the production potential, but for a way to spend their money they make in other industries. Now the Eastern part of the state is being priced for oil extraction. It is a rare day in America that land is sold priced for production no matter in which state you live
5 hours ago
June 27, 2011
Norma “Duffy” Lyon, known as the Iowa State Fair’s “Butter Cow Lady,” passed away Sunday at the age of 81.
She sculpted her first butter cow for the fair in 1960, the first of 46 such creations, before she retired in 2006. Lyon also cast cows in bronze and iron. She and her husband, Joe, operated Lyon Jerseys Dairy Farm for many years, and were active in various dairy activities. Duffy is also a National Dairy Shrine Pioneer.Her full obituary from the Des Moines register can be read here
June 27, 2011
By: Ed Clark, Top Producer Business and Issues Editor
If the ethanol subsidy is eliminated as some in Congress are calling for, corn stocks-to-use could increase, potentially putting modest pressure on corn prices.
“The elimination of the blender’s credit could put discretionary blending at risk, and in a worst-case scenario would add 220 million bushels of corn back into inventory, driving stocks-to-use up from the current estimate of 5.2% to 6.9%,” says Ann Duignan, managing director, J.P. Morgan Equity Research. “This stocks-to-use ratio would be far from ‘burdensome,’” though, she says.
“Our analysis suggests that lifting the subsidies would do little to change ethanol industry fundamentals.”
“Ethanol producers are making money.” According to Duignan, at current prices of ethanol, corn, natural gas and DDGS, ethanol producers’ gross margins are 5.5%, down from a peak of 24.7% at the end of November 2009, but up her last ethanol review of 4.3% in March 2011. Margins have increased with flat corn prices, ethanol prices up 2%, DDGS up 5% and natural gas up 13% since early March, Duignan states.
As gasoline prices rise, the blenders’ spread widens, she continues. Spot ethanol (including freight costs) is currently trading at 14 cents per gallon below wholesale rack gasoline prices. Given that blenders receive a credit of 45 cents per gallon of ethanol blended, this implies that the blender is making about 59 cents per gallon of ethanol blended, or about $0.06 per gallon blended with 10% ethanol. This is a decline since March, when blenders were making up to 81 cents per gallon of ethanol blended (including the subsidy), she says.
At current prices, even without the tax subsidy, blenders make money. If the 45-cent tax credit were to expire on December 31 as planned, the incentive to continue discretionary blending still exists.
Imports from Brazil are not cost effective at this time.
Duignan notes that the U.S. Senate “symbolically” voted recently to eliminate the 45-cent-per gallon ethanol tax credit, which disproportionately affected agricultural machinery stocks. “We believe that the sell-off was overdone.”
WASHINGTON (Reuters) - The Senate voted overwhelmingly on Thursday to eliminate billions of dollars in support for the U.S. ethanol industry, sending a strong message that the era of big taxpayer support for biofuels is ending.
By Tom DoggettWASHINGTON | Thu Jun 16, 2011 6:38pm EDT
The 73-27 vote may ultimately be symbolic since the White House has vowed not to repeal ethanol subsidies fully and the bill the repeal language is attached to is not expected to make it into law. But it underscores the growing desperation to find savings in a budget crisis that is forcing both sides of the aisle to consider sacrificing once-sacred government programs.
"Ending this wasteful handout would ensure taxpayers no longer subsidize the already profitable corn ethanol industry," Democratic Senator Frank Lautenberg said.
The increasingly hostile attitude toward federal ethanol support has added fuel to a steep fall this week in the price of corn, from which most U.S. ethanol is made.
The Senate vote shows the odds are diminishing that the 45-cent-a-gallon subsidy the government gives refiners and the 54-cent-per-gallon tariff on imported ethanol -- both targeted in Thursday's vote -- will be extended at current rates beyond their scheduled expiration at the end of this year.
The Senate measure still faces a long road to becoming final. The White House issued a statement saying it was against a full repeal of ethanol subsidies, indicating it could use its veto power if the amendment continued to advance in Congress.
"We need reforms and a smarter biofuels program, but simply cutting off support for the industry isn't the right approach," Agriculture Secretary Tom Vilsack said.
The strong vote in favor of eliminating the $6 billion a year in ethanol subsidies reflects the push by both parties to rein in the government's huge deficit.
"The way we get out of trouble as a nation is a couple of billions of dollars at a time," said Republican Senator Tom Coburn, who co-sponsored the ethanol amendment.
The Senate vote also comes as criticism mounts globally over subsidies for corn-based ethanol, blamed by some for raising food costs.
Last week, the World Bank and other international organizations called on governments to stop their ethanol subsidies because of concerns they were driving up food prices.
While more ethanol is good for corn farmers, U.S. livestock producers argue their feeding costs have gone up, which has raised food prices for consumers.
CORN PRICE COLLAPSE
While a loss of subsidies may hurt profits for companies such as Valero and Marathon Oil that blend ethanol into gasoline, it would be unlikely to cause a large or sudden fall in ethanol output.
Fuel companies must still blend a minimum of 12.6 billion gallons of ethanol into the gasoline pool this year under the federal Renewable Fuels Standard. Current output is running at less than 10 percent above that rate.
But the prospect of an even modest reduction in demand has helped drive Chicago corn prices more than 12 percent lower this week, pulling them down from a record near $8 a bushel a week ago.
Traders are betting on reduced demand from ethanol makers whose profit margins are being squeezed by near-record corn costs and falling gasoline prices, in addition to the longer-term risk of reduced government support.
"This helps explain continued fund liquidation in the feed-grains today, as the continued record prices keep pressure on government to lower food prices," said analyst Mike Zuzolo of Global Commodity Analytics & Consulting in Lafayette, Indiana.
The Brazilian Sugarcane Industry Association welcomed the Senate vote. "Allowing other alternative fuels like sugarcane ethanol to compete fairly in the U.S. will save Americans money, cut dependence on Middle East oil and improve the environment," the trade group said.
The U.S. Renewable Fuels Association trade group called the vote shortsighted and said it didn't make sense given that the Senate voted less than a month ago to keep billions of dollars in tax breaks for big oil companies that are making record profits.
Senate Majority Leader Harry Reid asked his Republican colleagues who voted down the ethanol subsidies also to end government financial breaks for Big Oil.
U.S. lawmakers are working on other compromise measures to scale back ethanol subsidies.
Republican Senator Charles Grassley and fellow Democrat Kent Conrad have introduced legislation to continue the blender tax credit and import tariff at much lower rates for five years.
On Tuesday, the Senate fell far short of the 60 votes needed that would have stripped the industry of federal incentives.
The ethanol subsidy amendment on Thursday from Coburn and Democratic Senator Dianne Feinstein will be tacked on to an underlying economic development bill, which faces a difficult time passing the Senate.
Meanwhile, the House of Representatives voted 283-128 on Thursday to prevent Agriculture Department funding for tanks and blender pumps that the ethanol industry wants so stations can sell gasoline with higher ethanol blend rates.
The Senate took the opposite view, voting against a separate amendment that would have blocked federal funding for such ethanol infrastructure.