At the end of every year, I knock on Steve Kay's door and ask him a few questions about the cattle business and where it's going. Or where it's failing. Steve is the editor/publisher of Cattle Buyers Weekly, a newsletter that is read religiously by anyone serious about the business. It's one of two constants in cattle country: (1). Read it as soon as it arrives, and (2) Go to church on Sunday.
Steve writes for several publications as well as CBN. He speaks at venues around the world on issues related to the cattle business, reaping honors, accolades and awards for his work. Last year, he became one of only two journalists ever to be inducted into the Meat Industry Hall of Fame. In 2012, he was honored with the American Meat Institute’s (AMI) highest honor, the Industry Advancement Award.
Presenting the award, AMI Chairman Nick Meriggioli, president of Kraft Foods Inc./Oscar Mayer, said, "His newsletter serves as an essential resource to the industry and to policymakers, who cannot help but consider what he has to say because it is factual, logical and compelling."
“Steve is the kind of specialized, thoughtful journalist who is becoming a rare breed today,” Meriggioli said. “While he is at times a fierce competitor with mainstream media, he is also generous in his time with other journalists, offering the benefit of his knowledge as a third party expert and industry analyst.”
Steve has been kind enough to share his thoughts with me for several decades. This is his fifth year of answering my questions for Cattlenetwork. Take a few minutes now and read what a man with enormous clout has to say about the industry. You might be surprised at his comments about the cash and futures markets.
Q. One of the biggest media frenzies of the year was created by the IARC study linking processed and fresh red meats with increased incidents of cancer. By my count, hundreds of online and print publications wrote articles, many of questionable validity, and every trade organization related to the meat industry issued a statement. Would you step back, survey the landscape and issue your own statement? What was accomplished? How did the media and the trade associations handle it?
A: The study’s release and response to it might be a turning point for the U.S. livestock and meat industry. It has been battling dubious connections made between red meat and cancer for years. It did the same with the IARC report, and trade associations did an excellent job of pointing out the study’s short-comings.
Some important media outlets took note and gave fair coverage. But what happened next was remarkable, as the social media around the world mocked the study and mainstream media like the Wall Street Journal even a week later were running stories about meat eaters’ protests. Some commentators used the same arguments as U.S. trade groups had used, so one can assume the latter’s efforts really struck gold. The U.S industry in every respect led the way. In contrast, the Australian industry’s response was tepid.
The fact that the World Health Organization had to retreat so hastily and declare the study had shortcomings was the first victory for the industry. The longer-lasting one is that the WHO or any other group of scientists will now be under much more skeptical scrutiny if they produce further studies linking red meat to any disease. In fact, the issue might now be behind the industry. The way the social media trashed the study will also help the industry, if it involves social media even more, in explaining how livestock are raised and how meat is produced.
Q: The cash market for fed cattle has always been a staple of the industry. Will it continue to be or are its days numbered?
A: Its days are numbered unless producers mount a last-minute effort to save it. The last time a majority of cattle sold on the cash market was in 2005 (52.1%, with an additional 9.9% on a negotiated grid basis). Only 33.2% sold on a formula basis that year. In 2014, cash and grid sales totaled 27.4% and formula sales totaled 56.8%. From January through September this year, cash and grid sales totaled 24.7% and formula sales 58.0%.
The cash market has disappeared in Texas (3.8% cash and grid so far this year) and is disappearing in Kansas (11.4%). Yet Texas still sets prices for some people, sometimes on less than 300 head sold. This is unacceptable.
Most cattle feeders seem unconcerned about the cash trade’s disappearance. But how will they and packers price cattle when the cash market declines even more? Nebraska and Iowa-Minnesota have the only cash markets of any size but market participants in other regions don’t want to use those markets as a price basis as they are different.
Q: Let’s continue the discussion about markets. The futures market has been a useful risk management tool for years but has its recent extreme volatility made it a questionable option for cattlemen?
A: Right now, it is scarcely an option at all. It has been almost impossible to hedge cattle or beef when live cattle futures go up the limit one day and down the next. The volatility is causing headaches up and down the beef production chain. Cow-calf and stocker operators, cattle feeders and packers all use the futures to lay off risk and attempt to set prices. But the volatility has shattered their ability to do that. It has also likely cost the industry hundreds of millions of dollars.
For example, Tyson Foods’ beef segment incurred $70 million of hedging losses in September, when the October live cattle contract lost $20 per cwt. Tyson had hedged its forward beef sales against that contract.
Some people have cited the demise of the pits and open outcry trading as a factor in the volatility. Computerized, high frequency trading now dominates and some say such trading is divorced from the market fundamentals. But this might remain the norm in 2016 and so extreme volatility will continue. The industry should demand that the CFTC study the issue.
The shrinking cash market and futures’ unreliability as a risk management tool are inter-linked in that price discovery in the live cattle market is under its most serious threat in many years. The industry will need to address this issue in a way it has not done to date.
Q: One of the hottest political topics today is the Trans Pacific Partnership. As with any trade agreement, there will be winners and losers. In what might be a first for the ag industry, everyone who pushes a plow or raises an animal seems to be unified in their enthusiasm for the TPP. Political wrangling aside, what are the advantages for the U.S. cattle business?
A: The vast majority of cattle producers in the U.S. strongly support the proposed TPP because they see the tangible benefits of reduced import tariffs in Japan and other markets over 15 years. Such reductions are critical, as Australia is already enjoying reduced tariffs in Japan. Producers should lobby their members of Congress to tell them how the cattle, hog and other agricultural sectors will benefit from the TPP.
Q: Let's go over some old business. One of the most consistently thorny issues of this century is COOL. Time-and-again, WTO has told the U.S. to mend its ways. Canada's new P.M. has indicated he won't back down and Mexico seems more than willing to join Mr. Trudeau. Is it possible for us to reach a political consensus that meets the demands of our North American trading partners? What happens if we can't?
A. The time for a political consensus has long gone and was never going to occur. That’s why Canada and Mexico went to the WTO. Having won, the WTO is about to tell (on Dec 7) them what level of retaliatory tariffs they can impose on U.S. exports. Canada has requested $2.5 billion of tariffs annually and Mexico $713 million.
The U.S. put the cost of COOL at $91 million, an absurdly low figure. Canada and Mexico might start imposing tariffs, notably on beef and pork, before year end. The U.S. Senate will have to act to rescind the part of the COOL law that relates to meat and poultry, as the U.S. House did last June.
Q: We should talk about the state of the American cattle herd. A few years ago, it was at an historic low, on a par with the early 1950s. It has been slowly rebuilding, of course. Where are we now and where might we be in another five years?
A: The U.S. cattle herd bottomed at 88.526 million head on January 1, 2014, increased to 89.800 million this year and will increase again to 92.900 million by Jan 1 next year. Calf prices might decline 10-12% next year versus this year, so beef cow herd expansion next year will slow down. Prices might decline again slightly in 2017 and 2018. So I expect the herd to grow only modestly into 2020 to about 95 or 96 million head. This would put the total back or close to 2008 levels, when the herd began contracting in this current cattle cycle.
Q: Lastly, any comments you would like to share with the CattleNetwork audience?
A: Be proactive and force a discussion about the future of the cash live cattle market before it is too late.