CALF_News_August_September_2021

16 CALF News • August | September 2021 • www.calfnews.net from the need to improve cost efficien- cies such as coordinating logistics, and lowering marketing and procurement expenses. Consumer demand for higher quality beef elevated demand for specific cattle and further use of AMAs. Mandated negotiated cash trade could reduce the value of AMAs to produc- ers and feeders. Market channels for higher quality cattle “would be seriously constrained without this increased use of AMAs,” Tonsor said. “In short, increased use of AMAs reduces costs and enhances demand in some segments of the industry – both worthwhile out- comes that increase the economic pie for industry participants. “AMAs present a multitude of well- documented economic benefits to the industry and society while, by definition, reducing the volume of traditional, spot- market negotiations that historically have been the base of valuing fed cattle. …Without contemporary use of AMAs, I believe cattle prices would be lower as production efforts would not align as well with consumer demands. “I encourage the industry to proceed forward in a manner that does not deteriorate economic benefits of the industry’s evolution in recent decades to improve beef quality and align efforts with beef demand signals.” IS PACKER EXPANSION THE ANSWER? Black swan markets caused by the Holcomb fire, COVID and other astonishing events provided packers the ability to manage harvest-ready cattle supplies and available plant capacity to gain leverage, which increased their profit margins, notes TCFA leader- ship. However, “market leverage has already begun to swing back in favor of ranchers and feeders. To help prevent this from happening again and to allow for rebuilding the cowherd in coming years, more packing capacity is needed.” In July policy proposals by President Joe Biden and the U.S. Department of Agricul- ture, one aspect would provide $500 million to help build or expand smaller packing facilities. That’s a step toward increasing processing capacity. But how far would it go? While testifying at the June Senate hearing on “Examining Markets, Transparency and Prices from Cattle Producer to Consumer,” Dustin Aherin, vice president of RaboRe- search and animal protein analyst, said the recent disparity in margins suggests that there is opportunity to add packing capacity. “However, that opportunity does not come without significant risk,” he testified. “First, the upfront cost of a new or expanded plant is extremely expensive. Industry sources estimate that a new plant costs from $100 million to $120 million for every 1,000 head of daily capacity. Then, a new endeavor must meet regulatory requirements, build a labor force and keep enough cash on hand to absorb losses. It’s not just about building facilities; it’s about building a business model. “If all of the announced plans for plant construction and expansion come to fruition, roughly 8,000 head of daily fed cattle capacity and nearly 2,000 head of daily non- fed capacity could be added to the U.S. beef industry over the next five years,” Ahern added. “Recognizing current drought conditions, if the beef cow herd declines by 2 percent or less, there’s opportunity for about 5,000 head per day of profitable packing capacity expansion.” He stated there’s a point where packer capacity expansion goes too far to withstand cyclical periods of tight cattle supplies. “The long-term cattle cycle, drought risks and market fundamentals must be considered,” Ahern testified. “Whether in new or existing plants, increased technology implementation will be a critical component of future success.” Texas A&M’s David Anderson asserts that considerations for building or expanding packing plants can get side-tracked by many things that can sway cattle and wholesale beef markets. “Profits should encourage or incentivize expansion in packing, but the cyclical nature of the industry and the dollar investment makes that picture cloudier,” he adds. “In the short term, I would argue that profits of ranchers or feeders don’t matter much to pack- ers. However, in the long run, they matter a lot. “Prices have to be high enough, or profitable enough, to keep ranchers and feed- ers producing cattle that will go to a plant. We also operate in a cyclical industry due to economics and biology, and some drought thrown in. The cyclical nature of cattle numbers changes capacity utilization and negotiating power from year to year. “Historically, it is pretty rare for every segment of the industry to profit at the same time,” Anderson points out. “But when one segment of the industry sees its profit margins much healthier than the others, then further investigation as to ‘why’ may be called for. “We have these mechanisms [judicial review] in place to investigate and to do something about it if it’s found,” he says. “Those are there to protect consumers and producers, and more efforts in that area are probably appropriate.”  PRICE MARGINS Continued from page 13 Texas A&M’s David Anderson says calls for packer expansion must weigh the economics of building and running such an operation, noting, "The cyclical nature of cattle numbers changes capacity utilization and negotiating power from year to year." Photo courtesy Texas AgriLife Extension