The US Department of Agriculture (USDA) has released an initial report about the beef packing industry.
It’s been a year since Ag Secretary, Sonny Perdue, launched an investigation into the meat packing industry amid concerns that there might be illegal manipulations or collusions going on regarding the pricing of meat products.
The initial report does not address those concerns, but evaluates the market conditions and makes recommendations for changes that might improve the industry’s vitality. USDA states that their investigation regarding the possibility of illegal market manipulations will be on-going.
In general, the agency addresses some of the problems they found and makes recommends for additional regulations and for tweaking existing regulations, which were put into place to create and sustain a concentrated market, dominated by a few large companies. A concentrated market means a market that is mostly monopolistic with only a few established companies in operation, protected by restrictions which curb potential competition and inhibits self-correcting market forces.
The USDA analysis found that a fire at Tyson Packing Plant in Holcomb, Kansas, in August 2019, which took 5 to 6 percent of the nation’s beef processing capacity off line for five months, largely contributed to earlier disparities in pricing. The fire, unfortunately, coincided with a peak demand for beef that occurs around Labor Day every year. Because the shortage pushed up the price of boxed beef, market forces kicked in and other plants were encouraged to increase production which compensated for the capacity lost at the Holcomb plant.
Even before the coronavirus, there was concerning disparities between the price of Choice boxed beef and the prices that ranchers received for fat cattle. Prior to the onset of the virus, the spread between the two price points was $67.17 per hundred pounds of meat. The gap became even wider with the impacts of the coronavirus
When many employees of packing plants began contracting COVID-19, prompting the closing of facilities, processing capacity dropped by 40 percent by the end of April. At that point, the difference in what packing companies received for boxed beef and what they paid the livestock producers for the beef was $279 per hundred pounds of beef – a whopping 300 percent above the record, set just months earlier.
As restaurants reopened and public activity returned to more normal conditions, in May the gap between the two price points began to narrow and it continues to do so.
Changes in the beef market were already in play in March due to the way consumers changed their buying habits. Stay- at –home mandates across the country prompted more people to prepare food at home which increased demand at grocery stores. As in keeping with the natural law of “supply and demand”, the increased demand pushed up those retail prices. At the same time the forced closure of restaurants, brought about a dramatic drop in demand for beef for food service companies, which are a different distribution system than that which serves grocery stores. Regulations prohibited the redirecting of the surplus beef in the service supply line, to areas of greater demand such as grocery stores, which would be expected to happen in an unrestricted market.
The USDA recommends improving transparency in pricing by imposing a regulation that would require packers to negotiate at least half of their weekly cattle needs on “the negotiated cash market” for product that is to be delivered within 14 days. The report said that when the events that led to reduced packing capacity happened “cash trade plummeted, making it difficult for industry participants to know prevailing prices.
The USDA also suggests that cattle producers do not know how to manage market risks and need government directed “risk management training.” They also point out that the Risk Management Agency’s Livestock Gross Margin and Livestock Risk Protection program can be improved to help producers manage risk.
When consumers found empty shelves in their grocery stores during the COVID panic, they turned to local small processors or tried to purchase meat directly from the farmer or rancher. The demand quickly overwhelmed the small producers, a problem the USDA suggests could be helped by offering grants to assist small meat processors to expand their businesses, which would increase competition in the overall packing industry.
The document states, “USDA further recognizes there are many discussions about reducing the burden for smaller meat processors, asserting that the high cost of compliance with Federal requirements are barriers to entry and/or survival.”
It goes on to recognize, “The current pandemic has also created a resurgence in demand for services provided by these small and very small processors, and for consumers who are interested in buying their meat more directly from the farm and ranch where it was raised… USDA is committed to working with stakeholders to balance food safety with these growing consumer preferences and growing e-commerce platforms.”
Pointing out that small producers and cooperatives often struggle to cover the mandated costs of operation, the agency reminds that there is USDA Rural Cooperative Development Grant funds to provide assistance in organizing and forming co-ops.
Also, the agency sees a need to update the Packers and Stockyards Act, which regulates the industry. The report states, “Beyond rulemaking, small and medium-sized producers could also benefit from updates to the P&S Act designed to offset the impacts of operating in a concentrated industry, where the market power resides with large meatpackers. Smaller producers often find themselves to be price takers in the market for fed cattle and lack the volume of larger producers to negotiate unique and advantageous marketing agreements with large meatpackers.”