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Steve Cornett: A Phantom Itch

The opinions expressed in the following commentary are those of Steve Cornett, former editor of Beef Today and a life-long cattleman in the Texas Panhandle.

Did you ever have a phantom itch? Like it seems your elbow itches, but it doesn’t help to scratch where it is because the itch is elsewhere in your body.

I think that is what’s going on in the cattle market with this mandated cash trade idea. Something itches and it seems to some (many, apparently) that a law—a law, mind you—designed to force the weakest cattle feeders to sell on the cash market rather than taking advantage of contracts and formulas should scratch it.

But. How?

I mean what we have itches awful. The modern feeding business was built around bid and offer cash trades. For cattle. Not meat.  If you don’t want to sell cash, then you bid and offer this or that above or below this board price or boxed beef or, shucks, the prices of shoes in Tulsa. But you tie to something. And that has been, since I was calved, cash cattle. Now only the stubborn—or weak—sell cash.

And so, a lot of folks think we should mandate with a law—a federal LAW, mind you, because those always work out so well—that more feeders sell in the cash market.

Fine.

But how is that going to raise the price of fed cattle? Put yourself in the freshly-shined Florsheims of a packer. You have to buy half your cattle with a cash bid and 14-day delivery. But, you can then write contracts for the other half of the cattle. Ok, first you do a formula with your brother-in-law. But then, you know which feeders are hard to bargain with. You know who’s got an itchy customer. You know who has a pen that needed a truck yesterday.

Steve Cornett

So, after your brother-in-law, to whom shall we offer contracts? The farmer feeders? The independent feeders? Hmmm. Well, traditionally, we’ve bought their cattle cheaper than we’ve been able to get from big feeders with the staff MBA’s, who outranked your MBA’s in college, and owners just as savvy as you and just as steely-eyed. Who do we want to set the basis?

Who do we want bidding higher on the right kind of feeder cattle? Who do we think we can count on to keep our lines full of predictable quality cattle? Remembering, of course, that when we offer the cash guy an extra dollar, he gets one dollar, but it costs us two dollars because we’re pricing two animals. His and the formula beast. Is that going to put upward or downward pressure on a bid?

Yes, I know that’s the current itch. That’s what they do now. We’ve been arguing that since the first formulas happened. So did the first formula guys, as I recall. They saw this problem down the road. We need a snubbin’ post to tie to. OK. Think hard. Oh! Let’s make the same problem apply to more cattle feeders.

Sorry. I know we need something new in value discovery. But this is scratching a phantom itch.  

I don’t know the answer, but I’m doubting we’ll find it in DC. We might find it in something the feedyards work out among themselves. They might make use of the Capper Volstead Act to cooperate on pricing. That’s already a law. Congress could include feedyards in it. Or at least the independents might band together like a co-op. Maybe they’d be the cash everybody ties to. I DON’T KNOW what will work. NCBA has a committee working on it. Good luck, folks. During the 70’s, similar blue ribbon panels from the industry, started Cattle Fax to keep producers up on the market. They pushed through prompt pay, which scratched a legitimate itch at the time. {Packers—there were many—would go broke and leave feedyards hanging). That worked pretty well for a long time. But that was for turning out tonnage. One price steers, one price heifers. Good, bad. Same price. Now, we’re turning out good beef. Prime stuff. Partly because feeders changed the way cattle are priced and returned some of the premiums to producers raising the right cattle. And beef demand has finally begun inching back up.

Anyhow, there are a lot of cattle feeders doing pretty well in this environment, using the tools—from the CME to formulas—that certain elements have fought from the git-go. Those are the guys still paying up on feeder calves, providing (what I fear is a temporary) shock absorber for the cow calf sector. In past black swans, calves have hit the tank along with fed cattle.

At last to my main point: It should be the feeders, not farmers and ranchers, and certainly not auction barns, who take the lead on this. They know a lot more about their business and how it works than we do. And doing it right is not easy. And as go the feed yards, so go those of us with some calves to sell. Sorry guys, I just don’t think I want Jon Tester and Nancy Pelosi rewiring my house or designing the cattle industry of the future.

I’m not saying the packers don’t collude, I don’t know. I don’t think they need to. They know the market. But I doubt the government will prove anything. They sure might decide the companies are big enough to be regulated like utilities. I could argue it would be nice to force them to divest their competing meats and, for that matter, their feedyards. But I doubt they play golf together like Tester claims. I’m not convinced they have any interest in forcing the market structurally lower.

But I digress.

Even if this event of “I’m from the government and I’m here to help” works, we’ll still be us. And the cattle cycle will still be the cattle cycle. And we’ll breed ourselves right back into agony. And we’ll scream like a branded calf. This has been going on forever. As for now, I’m afraid we’re in for a long, hard time. There may be a million fed cattle backed up. After that spurt of “fill the freezer” demand, consumers are sated. And who knows when beef-hungry restaurants will reopen. I share the frustration. But tying feeders’ hands like this isn’t the answer.

Years ago, I helped a very successful cattle feeder with a speech. He had built and filled his feedyards from scratch. Smart, smart, man. Survived the wreck of 73 and came out the other side a bit wiser, a bit more chastened, a bit more cautious about production costs and debt, and the line I remember we agreed on Is, “the next wreck will be different. It will be a different surprise. But it will be a surprise. So be prepared.” There have been several surprises since then. Off the top of my head: The mad cow. The dairy buyout. The drought of 2011.

This proposed law isn’t going to protect you from those things.

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By: Drovers

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