Farmers Get Creative as Profits From Soaring Beef Prices Fail to Trickle Down
STEINAUER, Neb.—Wholesale price of beef was up some 40 percent in May, compared to the average in 2019, according to U.S. Department of Agriculture (USDA) data. Supermarkets and restauranteurs have partly absorbed the price increase and partly passed it on to customers.
Curiously, however, there seems to be neither a shortage of beef, nor a drop in demand. In fact, ranchers have so much cattle, they struggle to get it off their hands and meat packers, it appears, are running near capacity.
The unusual result is that small farmers struggle for survival even as packers haul in blockbuster profits.
The situation is tied to the CCP (Chinese Communist Party) virus pandemic and the government response to it. The initial outbreaks and lockdown measures disrupted beef processing capacity, creating a cattle glut that the industry still hasn’t cleared.
In addition, many Americans, shored up by unemployment and stimulus payments, aren’t too eager to pick up jobs. Meanwhile, trillions of dollars injected into the American economy are gradually being spent, bidding up prices of the products most in demand.
Finally, beef exports to China and other markets jumped in recent months, at least partially due to Argentina’s 30-day beef export ban instituted in mid-May to stymie soaring domestic beef prices.
Facing disappointing cattle prices and increasing feed prices, many American farmers have increasingly focused on alternative channels to get their beef to customers. They would team up with local meat lockers and offer the whole animal directly to consumers. Some even launched a project to build their own meatpacking facility.
A March-April survey by Beef Checkoff, a marketing and research industry group, indicated that Americans plan to barbecue this year even more than in 2020, when the pandemic lockdowns forced people to stay home, prompting a massive grilling season.
With both prices and demand this strong, farmers are looking hard for ways to bypass the packers and market straight to consumers. That’s where local butchers and meat lockers come in.
Usually, a small meat locker business is hard to sustain. The USDA requires one of its inspectors to be present at all times at any meat processing operation that intends to market across state borders. The USDA charges establishments about $65 per hour for its inspectors, not including overtime and other surcharges. That’s a more than $100,000 annual cost of entry for a business. Even for local sales, a state inspection is necessary, which must be at least as demanding as the federal one.
Lockers have been using “Custom Exemption,” which allows them to slaughter and process without inspection as a service for the animal’s owner. The arrangement is such that the locker connects the customer with a farmer who sells the customer the whole calf, which is then delivered to the locker for slaughter. The locker then delivers the processed meat, usually deep-frozen, to the customer.
The advantage is that the customer knows exactly where the meat is coming from and can arrange for the animal as well as the cuts to be as he wishes. Does he prefer fattier, corn finished calf or a leaner, grass-finished one? Does he want more sausages or more hamburger patties? How thick should the steaks be? All that and more can be arranged.
In addition, the customer has the satisfaction of supporting usually a small, local farmer who earns substantially more on a custom animal.
Custom orders have been a lifeline for Rod Christen, a third generation cattle farmer in southeast Nebraska.
At a local sales barn, he can get about $1.18 for a pound of live calf weight. Through the local lockers he can get up to $1.85. Of some 300 calves he raises a year, about 20 would go directly to customers.
Recently, his business has been on the upswing, aided by online marketing.
“It seems like consumers locally do genuinely care about where their meat comes from and are starting to want to know the producers behind it and want to know how the cattle were raised and some of those things,” he told The Epoch Times.
With beef prices as they are, custom orders have become more attractive for customers economically as well. Christen calculated a consumer price of under $6 for a pound of meat. While certainly a premium for ground beef, it’s a huge discount on the prime cuts.
But there are some disadvantages too.
A whole calf translates to about 500 pounds of beef and another perhaps 200 pounds of fat and bones. That’s a huge delivery for a single customer. Only about 25 pounds are the most desirable rib and T-bone steaks. Another 80 pounds or so are the sirloin, porterhouse, and club steaks. The rest are various roasts and ground meat (pdf).
A common solution has been for several customers, such as an extended family, to band together to buy the animal. Some lockers also accept somewhat smaller orders and wait until they add up to a whole calf.
Christen said another problem is that with the increased demand, lockers have been swamped, resulting in appointments being scheduled a year in advance.
“To predict how many you can sell and to whom you’re going to sell them a year in advance is kind of like throwing darts at the board,” he said.
Yet another problem is that such orders need to be picked up in person by the customer or at best get delivered within a limited radius.
To get around such constraints, Nebraska farmers and other stakeholders have decided to build their own mid-size packing facility in North Plate, about 70 miles east of the Nebraska-Colorado border.
A major facility would process about 5,000 calves a day. The investors are aiming for about 1,100 a day with completion by 2023.
They set up a company, Sustainable Beef, with a goal of helping local cattle farmers market their beef, especially to customers looking for an extra guarantee of quality and origin. One of their ideas is to use blockchain technology to ensure each cut can be traced to where it came from.
Nebraska Gov. Pete Ricketts supports the plan.
“Additional competition will be needed in the processing industry to make sure the kind of small calf-cow guys and feedlots can have someplace to send their cattle and have some leverage,” he told The Epoch Times.
The plant is set to cost close to $300 million. It would employ over 800 people and buy cattle from about a 200-mile radius. Some 30 percent of its output would go to exports.
Guts of the Market
Meatpacking is the thankless industry that takes a 1,000-pound calf, slaughters it, and turns it into hundreds of steaks, roasts, sausages, stew bones, and hamburgers for Americans to boil, broil, and barbecue. For a long time, the industry has been marked by overcapacity, always scrambling to get enough cattle to keep the lines running. Ranchers thrived on the ever-present demand.
Over the past several decades, the industry has consolidated and downsized, resulting in most of the processing falling into the hands of just four companies: JBS, Cargill, National Beef, and Tyson.
In recent years, the packers have been slaughtering about half a million calves a week. They mostly buy from large feedlots that take 700-pound calves from ranches and feed them corn until they reach the optimal weight.
It used to be that feedlots bought most of the cattle through negotiated cash transactions, such as through auctions at local sales barns. Now they buy about 80 percent through alternative arrangements that price calves based on formulas that include quality criteria and cash prices from the week before.
The alternative marketing is more efficient, saving money for every party involved, including the farmers, according to research by Stephen Koontz, agriculture professor at Colorado State University and expert on beef markets.
Many farmers have complained that there are so few bidders at local sales barns the prices get artificially depressed.
There’s a bipartisan bill in Congress that would mandate at least 30 percent of cattle trade be done in the cash market. Koontz considers that excessive.
He acknowledged that very little trade now occurs at auctions, but said the 20 percent of cattle still sold through negotiated cash transactions is more than enough for effective price discovery.
“Sometimes the right price takes one trade and sometimes it takes a hundred. Of course, more is better but sometimes the marginal value of that second trade is zero—and while more is better, it is also certainly more expensive,” he told The Epoch Times via email.
The question of “how much cash trade is needed” doesn’t have a simple answer, he said.
“Sometimes it’s a lot and sometimes it’s very few. And the evidence is that we can do fine with very, very few transactions.”
He would prefer the industry to set up its own rule-making institutions, similarly to the stock exchange. The industry could, for example, pay some of the large players to act as “market makers” who would be obliged to be always ready to buy or sell cattle, similarly to how stock exchange market makers ensure liquidity.
“More detailed trading institutions are better than a mandatory cash minimum,” Koontz said.
The packers have a natural advantage in the market as they can slow down or speed up their processing lines on relatively short notice. Farmers, on the other hand, need to plan their production years in advance. When the cattle reach their optimal weight, they need to be sold quickly as they lose value if they get too old and fat.
Many farmers suspect the big packers are colluding and using their market influence to depress cattle prices.
“If you get two buyers in the crowd and they sit next to each other and they say, ‘Ok, you can take this load, you take that load,’ well, that’s not competition, you know. They’re taking turns buying. And that’s kind of what’s happening on a larger scale with major packers. It’s the way we see it anyway,” Christen said.
About a dozen state attorney generals requested a Department of Justice investigation into the matter last year. President Donald Trump backed the request and the investigation is still underway. In May, six governors, including Ricketts, urged for the investigation to continue.
None of the big four meatpacking companies responded to requests for comment.
The cattle market situation has taken a turn for the worse in recent years due to several black swan events that affected beef processing. A 2019 fire at a Tyson plant in Kansas hit packing capacity and a May cyberattack on the JBS meat packing company caused delays in meat processing.
The most significant, however, was the disruption caused by the CCP virus pandemic and the subsequent lockdowns that forced packers to run at a lower capacity for several months or even temporarily close down. That created a backlog of about 600,000 cattle that needed to be slaughtered, USDA data indicate. The packers have run close to capacity since then, with a few dips here and there, but it appears it has not been enough to catch up with the backlog.
Koontz said that once you delay beef processing, “it’s hard to get caught up. … It takes them running on Saturdays and right now they’re running on Saturdays just to manage available supplies.”
The packers have “real trouble” processing any more than 525,000 heads a week, he said. “That is a hard maximum capacity. So there is trouble in the industry just running more and more every day of the week.”
With scores of cattle unable to be slaughtered, the price went down nearly 23 percent from January to July 2020.
“If that last pen of cattle you buy you can’t do anything with, what are they worth to you? Close to zero, right?” Koontz noted.
The price drop made last year one of the worst for cattle producers, according to Justin Oberling, a cattle buyer in Illinois.
“I’m fourth generation in this, and I’ve been in this business since I was old enough to walk. I have not seen a year that’s so dangerous,” he told The Epoch Times.
Oberling lost about three quarters of his income last year as the bids he was getting from packers were so low, he was sometimes losing money on transportation from sales barns to the plants.
He said farmers pour their hearts into their work, but if they can’t get an income out of it, it ceases to make sense.
“It is drying up rural America, no matter what state you’re in,” Oberling said. “Kids aren’t going back to the farm. They’re going to college and are moving away and not coming back because there’s no money in it.”
Cattle prices have recovered to pre-pandemic levels in recent months, though it’s not clear if that’s enough to spark more optimism as small farmers have been complaining about bare-bottom prices for several years already.
So if the packers churn out so much beef, how is the wholesale price so high?
It seems the packers are asking more for their product simply because they can—buyers are still buying.
Part of the reason is the gigantic injection of new money from the government, through loans, stimulus checks, boosted unemployment benefits, and other channels.
“The government lockdown broke the supply chain, and the government checks are preventing it from being fixed,” said Mark Thornton, a fellow at the libertarian Mises Institute.
“Mix that problem with a flood of money and credit and you have a big mess.”
Another part of the reason is that it’s not just Americans buying. More than 900 million pounds of beef was exported from March to May, according to USDA. That’s by far a record—the number had previously never crossed 850 million.
Exports to China and Hong Kong shot up to nearly 174 million pounds over the March-to-May period, compared to less than 55 million in the same period of 2019. China has long imported beef through Hong Kong so their numbers are best counted together.
South Korea beefed up its imports too, from less than 180 million pounds from March to May 2019 to nearly 220 million over the same period this year.
Some have argued the packers could run their operations faster if they increased pay and hired more people.
“They are colluding with each other to not ramp up their chain speeds and the plants,” Oberling said. “They’ve got the capacity to keep everybody current, keep the whole supply in the United States current, but they’re refusing to do that. Because they know they’re going to get the cattle anyway.”
It’s possible that the packers have a hard time hiring, though it’s not clear how much of an issue this is. The meat processing industry at large employed about 148,000 people in May, up about one percent from May 2019, according to Bureau of Labor Statistics data.
While a number of Americans are still concerned about the CCP virus and are waiting for more people to get vaccinated, the ramped-up unemployment benefits and several rounds of stimulus checks caused a situation where many lower-wage workers made more money by staying at home.
Most jobless Americans weren’t urgently looking for work, according to a May 26-June 3 survey by job listing company Indeed.
Those factors will soon diminish. About half the country has already received a COVID-19 vaccine and a significant portion of the population is refusing the vaccine and is willing to go to work regardless. The added unemployment benefits will expire in September and about half the states decided to cut the extra benefits even earlier.
The fact remains that there’s so much cattle being raised, packers have no problem filling their orders—there’s little pressure on them to pay more for it.
Americans may want to buy more for a better price, but as long as the packers can sell their inventory, they can just watch their profits grow on price hikes alone.
Yet, as Christen’s example shows, when consumers band together to buy straight from the farm, it makes a difference.
“That’s our method of survival,” he said.
Cara Ding in Illinois contributed to this report.