Coping With COVID-19

By Larry Stalcup, Contributing Editor

There have been wrecks, bad ones, like the 1970s beef price freeze, the ‘80s whole-herd dairy buyout and the 2008 recession that have cost the beef industry big. Then there’s this virus – ‘nuff said.

With COVID-19, the beef industry has projected losses that top $13 billion. There’s continued worry that agriculture’s share of the government’s trillion-dollar stimulus packages won’t offset already-crashed cattle prices.

The biggest gripe from cattlemen is the gaping gap between prices they received from packers and the price packers received for processed beef. That gap widened quickly. On April 2, The Texas Cattle Feeder’s Association (TCFA) market report showed carcass cutout prices at about $232/cwt., compared to fed steer prices of $112.

The cutout prices stayed in that range through April 17. But by April 30, they had surged to $367. They topped $458 on May 7. After reaching nearly $500, they had settled back to near $434 on May 15.

Meanwhile, fed prices, already slumping, struggled to stay above $100. And June Chicago Mercantile Exchange (CME) futures were $15 to $20 below that before rallying to above $92 from May 7 to May 15.

On May 15, fed cattle prices finished with a little rally, with an average of about $112/cwt. That was still more than $320 below the cutout price gobbled up by packers.

It was impossible to mask the outrage among seedstock, cow-calf, stocker and cattle feeding operations. Were the Big Four – Tyson, Cargill, JBS and National – illegally manipulating prices? Were alleged antitrust violations fact or fabricated?

From the National Cattlemen’s Beef Association (NCBA) to the Ranchers-Cattlemen Action Legal Fund (R-CALF), many sectors of the beef industry called on Congress and the White House to examine whether antitrust laws were broken.

On April 8, NCBA sent a letter to the Trump administration, calling for investigations into antitrust violations. NCBA President Marty Smith signed the letter, noting that it was a follow-up to an inquiry last fall into the impact on markets after the Tyson plant fire in Holcomb, Kan.

“Now, six months into that [Holcomb] investigation, we are asking for the current market volatility to be analyzed and incorporated into that ongoing investigation,” Smith said. It was “in the hope of identifying whether inappropriate influence occurred in the markets, and to provide our industry with recommendations on how we can update cattle markets to ensure they are equipped to function within today’s market realities.”

NCBA also asked the Commodity Futures Trading Commission to study the influence of speculators on the CME Group’s Live and Feeder Cattle futures contracts. “[This is] to determine whether the contracts remain a useful risk-management tool for cattle producers. Fair and functioning cattle markets are vital to the sustainability of our industry,” Smith said.

June Live Cattle futures plunged from $120/cwt., in January to an anguishing $80 by early April. Basis was minus $20 from the cratered cash price. There was virtually no way to efficiently manage price risk.

NCBA called for the U.S. Department of Agriculture (USDA) to work closely with the Department of Justice (DOJ) to determine any possible wrongdoing by packers. On May 6, Reuters reported that President Trump had urged the DOJ to investigate allegations that packers broke antitrust laws.

“I’ve asked the Justice Department to look into it. … I’ve asked them to take a very serious look into it because it shouldn’t be happening that way and we want to protect our farmers,” the President told reporters at a White House event attended by Sec. of Agriculture Sonny Perdue. “Are they dealing with each other? What’s going on?” the President asked, according to Reuters.

Supply-demand disruption 

As COVID-19 spread to packing plants, employee health and safety forced many to temporarily close. Such actions may continue. Besides thorough sanitizing over and above strict government- controlled cleaning that helps keep U.S. beef and pork the safest worldwide, packers had to establish “social distancing” for employees and outfit them with personal protective equipment (PPE).

Worst of all, the backed up, highly synchronized pork supply chain forced some producers to euthanize thousands of hogs. Some milk producers dumped much of their product after dairies lost major markets when restaurants and schools were forced to close nationwide.

With the temporary shutdown or reduced speed of processing at beef packing plants, weekly cattle slaughter numbers were reduced 30 to 40 percent or more.

“Before decreasing sharply in mid-April, weekly cattle slaughter had averaged 634,300 head per week for the first 14 weeks of the year, up 4.3 percent year over year,” notes Derrell Peel, Oklahoma State University (OSU) livestock marketing economist.

At the same time, anxious and fearful consumers wiped out meat counters. Retail demand increased for packers. Conversely, their livestock demand decreased due to a smaller processing capability.

Many finished cattle had nowhere to go. Numbers built up. “Producers wanted to market a volume larger than plants were positioned and capable to handle,” says Glenn Tonsor, Kansas State University agricultural economist, in a recent K-State AgManager report.

More cash trade needed

Along with antitrust disputes, many questioned whether formula or grid pricing were damaging cash markets and price discovery. There are calls for Congress to mandate more cash trade.

In an April NCBA podcast, Darryl Blakey, NCBA associate director,
Legislative Affairs and Market Regulatory Policy, and Stephen Koontz, Colorado State University agricultural economist, tackled the question of whether “one size fits all” in cash marketing.

“I understand the frustration. But we need to do things science-based,” Koontz said. “There’s not a real simple answer to price discovery. The incentives to go to formulas and forward contracting are there – they result in better calf prices. If you legislate things [cash trade], you limit your flexibility for change. “

Koontz said it’s important to use objective research in helping solve the lack of cash trade issue. “Big operations need to move cattle every week. Packers need to move product every week. If formula cattle work well, it goes back to better prices for cow-calf producers. But in that process we have lost some depth in price discovery.”

Koontz said more industrialized feeding operations use more formula pricing for cost mitigation. “They capture premiums for quality,” he said. “But you can lose robustness of a negotiated cash market. Front and center is Texas and Oklahoma feeding. There needs to be additional cash trade.

“To a lesser extent are issues in Kansas and Nebraska. Also in Colorado, with only two packers buying cattle. But Texas needs to do something about it [negotiated cash] and it needs to be real soon.”

Ross Wilson, CEO of Texas Cattle Feeders Association, tells CALF News negotiated cash trade has averaged 6 percent; negotiated grid purchase has averaged 1 percent; forward contracts have averaged 6 percent and formula trade has averaged 89 percent in Texas, Oklahoma and New Mexico feedyards since the start of 2020.

However, the high number of formula-priced cattle has generated higher prices for quality cattle. “The ability for cattle feeders to market fed cattle based on carcass characteristics has allowed both cow-calf and feeders to be rewarded for decades of investments in genetic improvements and feeding practices,” Wilson says.

“Over time, more producers have chosen to market their cattle in this manner, in lieu of only marketing cattle based on an average price, which provides fewer signals to improve quality.”

Wilson says TCFA recognizes the importance of increasing price discovery. He cited a study by Koontz that features recommendations for minimum levels of negotiated trade for each of the major cattle feeding regions.

“For Texas and Oklahoma, the recommended level of negotiated trade is 6 to 13 percent [on average],” Wilson says. “We are actively working to achieve those levels through free market mechanisms and not government mandates.”

One so-called 30-14 proposal requires packers to purchase at least 30 percent of their individual fed cattle needs in the negotiated cash market for delivery within 14 days. Another proposal by Sen. Charles Grassley (R-Iowa) and Sen. Joe Tester (D-Mont.) in May, calls for a 50-percent negotiated cash trade.

Both would be government mandated. A few groups support it. NCBA, TCFA and a host of others are against the mandated rules. On May 13, South Dakota rancher Todd Wilkinson, NCBA Policy Division Chair, responded to the 50-14 proposal.

“Increased price discovery will benefit all segments of the cattle industry — that is why NCBA has been closely working with key stakeholders, industry experts and our partners in academia to develop tangible means to meet that end.

“[However,] any solution must not restrict an individual producer’s freedom to pursue marketing avenues that they determine best suit their business’ unique needs. Government mandates, like that being proposed by Sen. Grassley, would arbitrarily force many cattle producers to change the way they do business.”

Koontz counters reports that he allegedly supported the 30-14 plan. In a letter sent to NCBA on May 4, Koontz wrote, “My research does examine the impact of declining negotiated cash trade on price discovery in regional and national fed cattle markets. And it also attempts to make recommendations as to the needed volumes of cash trade for minimal and robust price discovery.

“But my work does not recommend, and I do not support, a mandate of a given percentage cash trade.

“The main issue I have with the policy proposal is that it would cost the cattle and beef industry millions and possibly billions of dollars per year. This is known from research in which I participated. The U.S. Congress funded the USDA-RTI Livestock and Meat Marketing Study in 2003 and the work was completed in 2007: https://www.gipsa.usda.gov/psp/publication/live_meat_market.aspx.

“The use of alternatives to the cash market are cost saving and revenue enhancing. The main beneficiaries of these relationships are the cow-calf producing sector and the U.S. consumer.”

Don Close, vice president for Rabobank in St. Louis, points out that there have been talks of making changes in the USDA five-state reporting districts (Texas/Oklahoma and New Mexico; Nebraska; Kansas; Colorado; and Iowa/Minnesota) to add Wyoming and Illinois to the reporting states.

“There was also discussion of transitioning to a three-region system in order to capture more cash transactions and work around confidentiality,” he says, noting that he favors adopting the three-region approach. “I think it’s only a temporary solution, but it would buy time to explore ways to develop and transition to an alternative price discovery system.”

He says, however, that since the market has transitioned from selling cattle on the average in the cash market to marketing on individual carcass merits, “I believe the industry is spending too much energy in trying to revive an antiquated price discovery system when time could be spent trying to develop a new system that more accurately reflects how cattle are sold today.”

Set-aside payments

With a 20- to 40-percent decline in slaughter capacity caused by COVID-19, the Beef Alliance in Manhattan, Kan., is promoting a government set-aside program. It would support cattle feeders who can’t get cattle marketed in time. It is similar to a program used previously in Canada.

In the program, payments of $2.90/head for 75 days would enable feeders to provide a maintenance ration for cattle. It would provide about $217 per head. Overall cost would be about $326 million.

Mary Soukup, Beef Alliance managing director, says CattleFax forecasts based on USDA data indicate that fed steer and heifer slaughter will be down between 600,000 and 1.5 million head through the end of 2020. There is potential for many of those cattle to benefit from the set-aside program.

Soukup says the program is not intended to allow producers to recoup all economic damages. “It will prevent massive economic loss throughout the beef cattle industry caused by a total breakdown in a system that has oversupply due to removal of production capacity,” she says. “The proposed set-aside program will also provide certainty and confidence in the food supply.”

The Beef Alliance is working with NCBA and state trade associations to build a coalition. “We’re working to get them acquainted with the program,” Soukup says. “We’re also having some conversations on Capitol Hill. As Congress moves forward with the next relief package, we hope to get the set-aside program approved in that bill.”

Stimulus help

On May 19, Uncle Sam announced provisions for the multi-billion dollar Coronavirus Food Assistance Program (CFAP). USDA said local Farm Service Agency offices were to begin accepting applications for CFAP funds, which the Trump administration hoped to begin rolling out to producers in early June.

CFAP assistance is available to livestock producers who have an ownership interest in eligible livestock that have suffered a 5-percent or greater price decline as a result of the COVID-19 pandemic and face additional significant costs in marketing their inventories due to unexpected surplus and disrupted markets.

According to USDA, a single payment for livestock will be calculated using the sum of the producer’s number of livestock sold between Jan. 15 and April 15, 2020, multiplied by the payment rates per head and the highest inventory number of livestock between April 16 and May 14, 2020, multiplied by the payment rate per head. For payment details, go to https://www.farmers.gov/cfap/livestock.

USDA encouraged producers to assemble information on a farm or cattle operation’s recent sales and inventory and set up an appointment at their Farm Service Agency (FSA) office.

Producers must provide the following information to qualify for CFAP:

nð  Total sales of eligible livestock, by species and class, between Jan. 15 to April 15, 2020, of owned inventory as of Jan. 15, including any offspring from that inventory; and

nð  Highest inventory of eligible livestock, by species and class, between April 16 and May 14, 2020.

OSU’s Peel notes the $19 billion program includes $16 billion in direct payments to farmers and ranchers. That included $9.5 billion of emergency funding from the Coronavirus Aid, Relief and Economic Security Act (CARES) and $6.5 billion of funding from the Commodity Credit Corporation (CCC).

An OSU study estimated total losses to the beef cattle industry of $13.6 billion including $9.2 billion in 2020 losses. Peel says damage to the cow-calf sector was estimated at $3.7 billion, along with $2.5 billion in losses to stocker producers and $3 billion in losses to the feedlot sector. Additionally, Peel says the cow-calf sector would incur another $4.4 billion in long-term losses if the 2020 damages were not compensated.

Producers and feeders nationwide remain antsy over the wait for CARES help. “Secretary Perdue has repeatedly said that he wants checks to producers by the end of May,” says Jill Johnson, executive director of the Illinois Beef Association. “In the meantime, it is important that you prepare documentation of your losses and have as much documentation on your operation as you can get.”

According to the USDA, “CFAP payments are subject to a per person and legal entity payment limitation of $250,000. This limitation applies to the total amount of CFAP payments made with respect to all eligible commodities. Similar to the manner in which statutory payment limitations are applied in the major commodity and disaster assistance programs administered by FSA, payments will be attributed to an individual through the direct attribution process used in those programs.”

That’s not near enough if you’re an operator of any size at all. NCBA and more than 20 state affiliates were part of another letter to Sec. Perdue encouraging USDA to remove payment limitations on producers who have suffered “extraordinary losses” from the COVID-19 pandemic.

“Still, this is just one step and much more needs to be done to address the needs facing family cow-calf producers and stockers in the CFAP details that were released today,” NCBA President Smith said. “We will continue to push Capitol Hill for additional resources for cow-calf producers, backgrounders, and all other segments of the industry who may not sufficiently benefit from the program in its current form.”

Packer capacity improving

“America’s Indispensable Industry” – that’s what Glenn Tonsor and Jason Lusk, Purdue University food and agricultural economist, call the meatpacking industry. That was magnified when processing chains slowed or stopped when workers got sick.

There were no shortages of beef, but when consumers stormed grocery meat counters in a panic, shelves were thinned.

In a May 7 meatpacking closure update, Lusk said that on March 12, cattle slaughter numbers were about 15 percent higher than the same period in 2019. That was when COVID-19 was still emerging. By April 13, the numbers were about 20 percent below 2019 levels. On April 18, the numbers leveled off at 40 percent below 2019. They started regaining ground about April 30 and returned to 30 percent below by May 7.

By mid-May, slaughter numbers were back to nearly 500,000, up by nearly 50,000 from the previous week.

With a workforce that’s predominantly different ethnicities, in which large numbers of people ride a bus to work together and/or live in one household,  the coronavirus spread quickly. As an example, the Tyson plant in Amarillo has about 3,500 employees. When the CDC and Texas Military Guard conducted mass testing in early May, infection rates were astounding.

The Amarillo Public Health Department reported May 18 that 1,500 Tyson employees had tested positive for COVID-19.

The JBS plant, about 60 miles north of Amarillo at Cactus in Moore County, was scheduled to conduct mass testing later in May. That was after JBS officials reportedly refused to allow independent testing of its employees, according to a Texas Tribune story.

Dee Vaughan, a Moore County farmer and county commissioner, says he and other county officials joined JBS officials to tour the plant on April 22. “The Texas Department of Health and Amarillo heath department were also on the tour,” Vaughan says. “They [JBS] had taken every other man off the processing lines so they could be 6 feet apart.

“Workers went to full-face shields and surgical masks. Tents were set up for breaks and mealtimes. Workers had to go through thermal imaging to see if they had a fever before they could enter the plant.”

Moore County has a population of about 21,000. About 540 had tested positive for COVID-19 by May 15. In Guymon, Okla., home to a Seaboard Foods pork processing plant, there were more than 600 positives. Guymon is located in Texas County, which has a population of about 20,000.

So rural America is far from being immune to coronavirus, where meatpacking plants are employers of thousands from different ethnicities.

“One thing that stuck out to me,” Vaughan says, “is that plant workers were maybe safer at the plant than when they’re off work.”

As the pandemic continues and businesses attempt to reopen and restart dead economies, state cattle associations and NCBA offer numerous links to COVID-19 information and help. There are dozens of webinars to attend. Here is the link to the NCBA sources: https://www.ncba.org/coronavirus.aspx.

Yes, COVID-19 is likely the worst wreck the beef industry has faced. Its impact will be felt for a long time. Until then, producers and feeders alike hope they can manage until the cows come home.