Get Better or Get Out
Jun 27, 2011
Competition is a frustrating thing. Still, there is a difference between war and business deals. In both, you have two sides. But only in one is “all fair,” and that’s because when you’re at war anything that hurts the adversary helps you. But in business, as often as not, the opposite is true.
As a buyer in a deal, I want my seller to make a profit so he’ll keep producing. As a seller, I want the buyer’s profit to allow him to pay fair prices.
Obvious, but largely missing from some of the rhetoric about industry structure and GIPSA’s proposed rule. Packers and cattle feeders, like cattle feeders and ranchers, are adversaries only once in the lifetime of a steer. At sale time, the one wants all the steer he can get for the money and the other wants all the money he can get for the steer.
That is an adversarial position. It does not, however, make the different actors in the beef business “adversaries.” On the contrary. Everybody has an interest in a more efficient, more profitable cattle business.
When I’m bidding on your feeder calves, I base the price I’ll pay on these variables: the price I can expect (or, more often, hope) to get and how much it costs me to turn your feeder calf into a fed steer. The higher the former and lower the latter, the more I’ll pay you. If corn goes up, your price goes down.
That means you, as the calf producer, have a vested interest in my success. You want me to get more and you want me to have to spend less. Because the more jam I get, the thicker you can spread your bread.
We all understand that, don’t we?
So why do so many of us not understand the same is true of fed cattle and packers? Granted, we need a fair market. We need to know that packers are playing by the rules. But absent of strong evidence—missing from all the studies on the matter—that they aren’t playing fair, we are spitting on our own faces to treat them as an enemy; to just presume that anything that hurts them helps us,
We do want things to be above-board. And, in that we’ve allowed four packers to pretty well control the cattle business, we should be willing to consider asking them to play a little like other players with outsized input in a market.
The question is how much do we want to hamper them? How much cost can we afford to add to their expenses? How much should we limit their management flexibility in hopes of getting a “fairer” market?
That strikes me as a Solomonesque challenge. Fairness is a very slick pig.
Fairness aside, one thing is for sure. Those who are putting their faith in this GIPSA rule to stop structural trends in the cattle industry are due for disappointment. Whether the rule is adopted or not.
At the supporters’ press conference last week, Mabel Dobbs, a part-time rancher from Weisner, ID, and chair of the Western Organization of Resource Councils, spoke for a large constituency when she said, “I came into this fight for fair prices as a banker and rancher’s wife running a thousand head of cattle. Today, I am in this fight as a grandmother, still wanting fair prices so my twin granddaughters can hopefully continue to ranch. That dream was ripped out from under us when unfair practices by the meat packers created volatility in the market and contributed to the loss of our ranches. We came back, on a smaller scale and with the help of an off-ranch income. Twenty plus years later, there is still no fair cattle market in which to participate. “
Without knowing how she believes “volatility in the market” drove her out of a ranch, and not wanting to cast any disparagement her direction, let me suggest that what we’re seeing is not just the “big getting bigger.” It’s the better getting bigger. The rest of us are getting smaller or getting out.
Wal-Mart and Costco and the other big players are squeezing the Tysons and Cargills and forcing them to, in turn, squeeze us. Our margins go down, our inflation-adjusted prices go down and the best and luckiest among us get bigger so they can continue to make a living wage. In the good old days, you could support a family on a hundred head cow herd. Don’t try it now.
There are many reasons behind all that, not the least of which is technology that allows single corporations to manage outfits as big as a Wal-Mart. Once they get that big—which they do by delivering value to customers—they have the power to force all sorts of pressures. Those pressures show up in the store as cheap Wranglers, Chinese-made American flags and cheap beef.
You can see from packers’ profit margins that they aren’t the problem here. Every time somebody at R-Calf wants to talk about this, they talk about farm to retail spreads. But when you break it down, most of the increase in those spreads have come at the retail level. That should give you a good idea of where the market leverage lies.
Packers’ margins have not appreciated significantly on a percentage basis—despite the fact that they are doing much more about beef marketing and beef safety than they did 20 years ago. They were under a 10% markup 20 years ago and they still usually are.
They didn’t take the market over by design. They simply did a better job than their adversaries in a tough business. They didn’t get bigger buying cattle cheaper than their competition—the market is the market, and certainly was when the consolidation occurred. They processed cheaper and/or marketed better. Their competitors just couldn’t do the job as well.
This is not a beef problem. It’s happening to everything from chicken eggs to clothes to televisions and, believe it or not, oil producers. Higher prices are not a cure-all for consolidation. Higher prices just let the better producers pay more to get bigger.
Consider this graph as a rebuttal to the argument that low prices have driven the much-cited disappearance of X-thousand farmers and ranchers from the business over the last X number of decades:
Why, if it’s low cattle prices driving consolidation, are the values of the primary production asset going up? Because people are going broke? If that was the case, as it was briefly during the 1980s, farmland values would be going down.
Sorry, Mabel. But the reason cattle producers are disappearing has much less to do with packers than with the way the economy is changing the business climate.
You’re not going to stop those mega-trends by picking on one little participant like meat processors. What you might do is add to their costs of doing business and thus force them to try to either force Wal-Mart to pay more or force feeders to sell cheaper. You already know who’s going to win that tug-off.
The beef industry has lost nearly 20 lbs. of per capita consumption since about the time of Ms. Dodd’s problem. That’s not volatility, it’s a steady decline
At the same time increased efficiency has allowed us to produce more—more—beef with fewer and fewer cattle and fewer and fewer producers.
So, go head if you must and adopt your GIPSA rule. Take out all Ms. Dobbs’ frustrations on the packers. The packers will adjust, just like GIPSA says they will. They will continue to thrive.
Just don’t expect it to have any positive impact on consolidation at the production level. The better will continue getting better and bigger.
The bad news here is that the government isn’t going to save you. You’re going to have to recognize the real problem and adjust your operation to it. Change the saying at your place to this: “Get better or get out.”