Cattle Complex Is Living up to Its Name - Complex With No Quick Fix

[Yeager] There's a new way to stay connected and know what's happening with market to market. When you subscribe to Market Insider, one email and a lot of information awaits you, go to markettomarket.org and subscribe to Market Insider.

[Yeager] Five countries are going to be part of today's discussion in this MToM podcast. And I'd like to say just five points in it, but this is way bigger than what we can get in just a few minutes. But we're going to try to power through a whole lot about the cattle market. We're going to talk about live cattle. We're going to talk about feeder cattle. We're going to talk about those that are the meat processing, the grocery store, the retailer who's getting squeezed, who's coming out ahead, headline risk, imports, inventories. And I have had conversations before. This one was probably one of the more intense ones back and forth of, you know, what he's thinking, what he's seen, what has been out there and what is impacting the market. It's hard to make sense of it all, but we certainly try to hear, with Derrell  Peel from Oklahoma State University, you've seen him before. Knows a lot about this market. So give him a listen here as we discuss, stories involving Brazil, Argentina, Mexico, Canada and China. You know, those are the big five. When it comes to agriculture. We're going to explain why in this installment of the MToM podcast, I'm Paul Yeager. Thanks for watching. Here we go. Doctor, I have read your name in print. Way more than I have. And I've always been sensitive to it because I know you. Which one of the media surprised you that called or emailed that wanted to talk to you about cattle?

[Derrell  Peel] Oh my gosh. I've had calls from lots and lots of people and really, I guess the way I would answer that is that it really goes back to earlier in the summer when kind of the, the, you know, the public broadly and the media broadly figured out the cattle, the beef prices were high. And I started getting calls from national media at a level that normally don't worry about cattle markets, but they do care. All of a sudden when it affects consumers. And so that's kind of what started it. And then of course, in the last few days we've added up, wave after wave of political statements and things to that. That has just ramped it up even more. So the short answer is I've talked to it feels like everybody on the planet in the last ten days.

[Yeager] And now Paul and now we're talking to Paul. Yeah, really? We're at the end of the planet here.

[Peel] Oh, yeah. No, no, no, it's all good. It's still going.

[Yeager] But I know the people who are watching this. They know how. Yeah. Focused you are on this market. How much you know about the market. Have you had to, you know, now your work is so important to an audience that you maybe didn't pay attention to as much before. They didn't know who Derrell Peel was, and they didn't understand the livestock market. Have you made any new believers or people who sign up for whatever it is that you're talking about?

[Peel] Probably so, because, you know, the thing about these kind of situations and honestly, in that sense, it's a lot like what happened during the pandemic. Same thing. We had lots of calls from people trying to understand very complex supply chains. Now we're trying and it all comes back to the basics of how the cattle market works. And again, to a lot of people that don't really understand the, you know, the cattle industry, high beef prices just sort of seem to appear. They came up very suddenly. How did that happen? What can we do about it? Well, you know, you know, anybody that knows the cattle industry knows that we've been building to this for several years, and we've seen it coming within the industry. It isn't an instant thing, and certainly there's no instant cure. Once you're in a situation like we're in right now, just from the standpoint of the way cattle production works, you know, there's no quick fix. So I've had to explain that over and over and over again to a lot of people at levels that just don't know that and don't worry about it most of the time.

[Yeager] You understand markets enough to know that sometimes the market doesn't always tell the story immediately of what's happening on the ground. A, how long has this runup been going? But B, when did it start? Before the run up?

[Peel] Yeah, that's exactly you know, it. Yeah. That is the story. And so I recently wrote a newsletter article trying to relay the fact that, you know, from the last cyclical peak in cattle inventories, a cow inventory, specifically in 2019, we started a cyclical liquidation, but then the drought took over and it was really a drought liquidation that pushed us way farther, down on inventories than we intended to be. So we've been building for this since 2019, since the liquidation of 2020, really when the liquidation started. And, and so we find ourselves in this hole. And then, of course, one of the things that happens, in 2021 and 2022 was peak beef production all-time record beef production in the US, but that was in part caused by the liquidation. The nature of the cattle industry is when you have more animals than you can keep. In this case, it was nothing really more than we wanted, but more than we could keep because of the drought. How do you pare those numbers down? You eat your way out of that inventory. So beef production went up in 2022. And then after that it starts coming down. And then once you get to the point where now you're critically short of product, the productive part of the industry, the breeding herd, then beef production really starts to fall. And that's what we're seeing right now. And of course, we all know in the cattle industry that the next step is we have to save enough heifers out of that tight supply to start some rebuilding, which means that tight supplies have to get tighter before they can get better 3 or 4 years down the road. So we're in the middle of all of that. We don't have any real evidence that we're saving heifers yet. So, the tightest stuff ahead of us, the highest prices are ahead of us. And the reality that there's nothing anybody can do about it, hasn't really sunk in in all quarters yet.

[Yeager] All right. I told you I was going to bring up a little bit of what Ross Baldwin said. And you led me right to it here. Derrell, he said the major sell offs do bring into question massive herd expansion because he's already hearing that guys are, well, I'm just not going to sell feeders since they've pulled back so much. And he says that's exactly how massive heifer retention starts. Do you agree with that?

[Peel] It could be, you know, that could do some of it. If we haven't already sold this fall, you know, we talk about a fall run of calves, typically in most parts of the country, the bulk of the herd nationally is still spring born, weaned in the fall. Now, I know in Oklahoma, because of the counter seasonally high prices we had in August and early September. Really July, August and early September. We sold a lot of our fall calves early, so a lot of that fall run is already done. But to those who hadn't sold yet, yeah, this might be a, this might, provoke some of them to hold some heifers. Maybe it will start it. In any event, it's not going to be like a really massive thing and it won't be equivalent to what we did in 2015 when we started the last real buildup, because we just simply don't have enough animals to do that. But it could be the beginning of it. It's the sign we've been looking for to kind of start the clock ticking on the path forward for the rest of the decade.

[Yeager] Which becomes, part of the education that you've been doing with your new friends is it takes a long time to build a herd back up. It does not just happen in six weeks.

[Peel] Yeah. You know, it's, I guess, surprising to some people that cows are big, slow growing animals. They reproduce one at a time. And if that one that you get from a cow happens to be a female, then you get to make one of two choices. You can either use or for immediate beef consumption, or you can invest in future production by not eating that animal. Now and there's just no way to change that. You know, we sort of jokingly say that unless we can magically figure out a way to get cows to have litters, we're not going to change this thing anytime soon. And, you know, that's just kind of the reality.

[Yeager] All right. I'm going to give you three countries. I kind of understand, I think, a little bit about what all three mean to the United States. But if you can help me with numbers and percentages, the challenge we have with Mexico is the New World screw worm. We get beef, we get cattle back and forth across the border all the time. Right now that border’s closed. That's a big story. Argentina was in the headlines last week, because we were going to bring in some more supply from them, even though we're, I think, still involved with tariffs. And Brazil is also, a country that we import things. I'm not even going to bring Canada into this discussion right now.

[Peel] Or China.

[Yeager] Or China. Give me Mexico, Argentina, Brazil. What's the importance of those three states or three countries?

[Peel] Yeah. You bet. You know, Mexico, of course, we're talking about the live cattle trade that's associated with the screw worm threat. The border has been closed most of the year, so we normally get an on average, for the last 20, 30 years, we've gotten, 1.1 to 1.2 million head of feeder cattle a year from Mexico. We got about 230,000 head across early in the year when the border was briefly open. But it's been closed since then. You know, as we speak, that may be changing. We'll have to wait and see. But, you know, if it stays closed for the rest of the year, that probably means that on that we will have brought in or will have brought in 7 to 800,000, had less feeder cattle than normal.

[Yeager] And what does that mean percentage wise?

[Peel] Yeah.

[Yeager] Great question because I can get the numbers, but I don't think I, I don't always understand what the percentage is on that.

[Peel] Well, you know, it's interesting we always talk about our domestic stuff in, in year over year percentage comparisons, cattle on feed inventory numbers. But when we talk about trade stuff, we often talk about it in absolute terms. And it sounds really big and scary. A million head of Mexican feeder cattle is about 3 to 3.3% of our calf crop.

[Peel] Okay, so it's not insignificant. But at the same time, it's certainly not the major factor here. And, you know, so lack of Mexican cattle imports is not why we have record high cattle prices this year. It is a contributing factor to tight supplies at the margin. If the border suddenly opens, we won't get a flood of cattle before the end of the year, because that's a process that takes some time. Plus, there's been a lot of uncertainty on all sides, so I don't think people are going to jump out there and commit to a lot of stuff, you know, immediately in a really big way. So it probably doesn't have much of any market implications for the rest of this year. If we go forward from here, then slowly, over probably several months to many months, we will rebuild back to the normal trade relationship there. Now it's to keep in mind, sorry that we also export beef to Mexico and import beef from Mexico. And so the cattle situation is it's all part of the same, you know, set of integrated markets. And so there are implications potentially for those other markets depending on what happens with the border relative to live cattle trade.

[Yeager] As we sit here though, the the thought on the headline was going to be the, Mexican, agriculture minister coming to the United States to talk to our basically agriculture minister, our USDA, secretary, and that the headline that would come out of it is, oh, here's the we're going to open up the border on this date. And that would send the market, it looks like as of now, that's not going to be an issue. We're not reopening the border. Is the market that sensitive to that type of headline right now?

[Peel] Right now the market is sensitive to everything okay. And part of that is just a function of being at record high prices. Markets get really nervous. And you know, if you're a betting man, the odds are better that you're going to go down than up when you're at record levels, just all else being equal. On the other hand, the fundamentals are very strong in terms of why we are where we are. But, you know, we're in such a tenuous political and, and economic environment broadly speaking, that the market is just really sensitive and really jumpy about anything. So, you know, and most of that falls in the futures market, which is what its job is. The futures market. You know, its job is to sort of anticipate the worst case scenario and that such it tends to overreact. And then usually the reality isn't the worst case scenario. So we pull back from that over some period of time as we get real news, as opposed to, speculating on what the worst possible outcome could be now. And what's happened lately is we've had such a barrage of things that they've kind of piled on top of one another. And so we've had this just massive impact on futures markets. It does affect cash markets. But again, I have reminded several producers in the last few days that the cattle market is not any different today than it was two and a half weeks ago, two weeks ago. Okay. We have the same cattle market, the same fundamentals. Nothing's changed. So this is short term stuff. It's a really big short term negative hit, but it probably won't last depending on what all comes out of it.

[Yeager] So last week's post about we're going to bring in beef from Argentina. Did the market overreact?

[Peel] Well, again, probably because again, in some sense that's its job. You know, you can say it overreacted in a couple senses. I mean, the reality is, Argentina accounts for about 2% of our beef imports. So even if. 

[Yeager] We got a product that's the product, not the live animal.

[Peel] Oh, no, we don't import any live animals from there. Right. Which is an important point to keep in mind as we go forward. Yeah. So that's beef. Beef products. About 2% of our imports come from Argentina. If they doubled it, it's still not a really big significant number. And I say double the tariff rate quota was increased by four times, but we were already getting imports from Argentina above the, the smaller tariff rate quota. So if they filled the full new quota it would be about a doubling of import from what they were. But, you know, only 2% of the total. And so the short answer is realistically will have any impact in the US beef markets. No, no. Part of the, you know, part of the reaction of the industry to that, probably as much as anything, was just the precedent, the idea that we're going to try to use import or trade to, you know, affect domestic prices in a very deliberate way.  This won't do it. But maybe the principle is, is something to, you know, be somewhat concerned about.

[Yeager] And what about Brazil?

[Peel] So Brazil, you know, through the first seven months of the year that we do have trade data for, we're for now, we're not getting any data. So that's also a part of the problem. We're operating increasingly in a vacuum. But the seven, first seven months of the year, Brazil was the largest source of imports, more than ten times as much imports as Argentina. But similar product. And as with most of our beef imports, the bulk of that product is lean processing type beef that goes largely into our ground beef markets. And, because of the and of course, that supplements our domestic supplies of we call it nonfat beef. So cull cows and bulls that make up the lean part of our ground beef mixes in the US. We absolutely have to have those imports, too, in order to sustain a critical ground beef market in the US, 40 to 45% of our total beef consumption in this country is ground beef. And if we don't support that market, and ground beef prices are the ones that have gone up the most because cow slaughter has decreased the most up to this point. Going forward, it'll be fed, fed slaughter and fed beef production that goes down. So that starts to affect steaks and all the rest of the beef markets. But ground beef markets have already been the ones that have been the most impacted. And these imports are critical.

[Yeager] Yeah. So the hamburger has been expensive. The steak is about to you're and you're saying going to get even more expensive.

[Peel] Yes. Absolutely. You know steak is going to get more expensive. All beef cuts. You know, from a carcass standpoint are going to get more expensive. Like I said, ground beef is kind of leading the pack right now, and it's getting quite a bit of attention because of that. And of course, that's our go to product when we start kind of trading down, beef products, you know, and it's all in relative sense, of course, but ground beef prices have gone up relatively more than other beef products over the last two years.

[Yeager] All right. Let's go back to the hamburger. Then again, if we could, you mentioned the lean parts and then the fat parts that come together. So how much of that pot is from another country and not from the United States?

[Peel] We produce excess, basically, of the fatty trimmings, 50% lean. Call it. It's more complicated than that. But in simple terms, 50% lean comes off of our fed steers and heifers, okay. And we produce a lot of that. And in fact, right now we're feeding cattle to really heavy weights and an awful lot of that is fat mark on these cattle. So we're producing a lot of fatty trimmings right now. And we have to have lean to go with it. We use our cull cow and beef to do that. We could grind other parts of the carcass for lean rounds in particular, very lean, so we could grind them. And we do grind some. But most of the time, you know, we've already paid to feed those in a feedlot. Those products typically have higher value than for grinding. So we don't like to do that. Or at least it doesn't make a lot of sense to do that. And then the imports are the third source of that lean product that we used to do that. Now think about this. If you've got 90% lean product from where it's coming from, US cull cow slaughter or are imported beef, 90% lean and 50% lean trimmings off our feed cattle. If you want to make an 85% lean ground beef mixture, it takes 7 pounds of 90s for every 1 pound of 50s. That'll work out to be an 85% lean mix, so it takes a lot of that additional lean to mix with the fatty trimmings that we're producing on our fed cattle. Now, that leads to, you know, two conclusions that are really important, I think, for producers to keep in mind. One is imported beef to the extent that it allows us to utilize the fatty trimmings for our fed cattle, actually makes our fed cattle worth more. Okay. If we didn't have that ability to use that stuff, we would render that stuff down into fat prices instead of selling at ground beef prices. At the other part of it is, again, our ground beef market is so critical. If we don't support that to levels and think about where competition in the beef industry comes from, relative to other proteins, chicken in particular, it's not at steakhouses. That's not where we compete with them. We compete with chicken as a beef industry in that little place where you drive through and somebody hands you something in a bag through the window. And so if we don't support that ground beef market to meat, remain as competitive as we can possibly be relative to, chicken or, and maybe pork to some extent to that's where we, we stand to lose some demand or impact demand in some negative way if we don't, stay as competitive as we can be in that market.

[Yeager] So the imports are better for value or better for bottom line. I guess they're kind of the same there.

[Peel] Well, the bottom line is that and again, this seems counterintuitive. I get that it's kind of hard to get. But both beef imports and exports add value to the U.S. beef industry. And that's again and what it really highlights that I think a lot of people forget, both within the industry and outside the industry, is that beef is not one thing. This industry produces thousands and thousands of different products, and the mix of stuff that you naturally get from the industry when you process animals into those thousands of different products, doesn't necessarily match up with the exact mix of products we prefer to consume. So trade both exports and imports allows the market, or is the market's way of trying to sort of tailor, adjust the mix of products in the market to match consumer preferences in the U.S. if we don't export some of that stuff, we will eat it here. It all gets eaten somewhere, but if we eat it here, it might be at the expense of us spending more money on something we'd actually rather eat. You know, it's kind of like, you know, guys that have beef at home understand this. There's always that stuff in the bottom of the freezer when you're about out of the last beef you processed and, and you know, you want to go get a new one and get some steaks and maybe hamburger, you're down to shanks and other things. And somebody in your house says, no, you've got to eat that stuff. Before we go get any more beef. Well, that would have happened in a whole country if we didn't have both imports and exports to help tailor the mix of products in this market,

[Yeager] To more countries, if I could. Canada. What's the I mean, I mean, we're always back and forth with them right now. What's their role? They're more of the animals than the product, right.

[Peel] It's both actually. So again, like Mexico now we have a very integrated market. Effectively, we have a North American cattle and beef market. And I think if we recognize it that way, it makes more sense all the way around. So we do import a more diverse mix of cattle from Canada. You know, most of it is actually fed cattle coming out of feedlots in Canada that are simply going to packing plants in the U.S. so it's a matter of infrastructure use. We import some feeder cattle that go straight into U.S. feedlots. And we at times actually export a fair number of cattle to Canada. So right now, as we speak, or at least prior to a week ago, Canadian buyers were in northern US buying a lot of feeder cattle. The last two years in particular taking them up to Canada to support their feeding industry. And then those cattle mostly come back at some point to be processed in the US. So and then you in addition to that, you got all the, the, import and export. We do bilateral trade of beef with Canada. And, and as we do bilateral trade with Mexico as well. And so all of these markets are in some level interrelated. It's kind of like a balloon, you know, you can push it on one side and it's going to pop out somewhere else if you, if you start, you know, looking at one market in isolation, that's not really going to work very well.

[Yeager] And is there anything with China right now? I mean, it beans gets all the headlines, when it comes to agriculture and trade. And I know it's about minerals and, protection is I mean, there's all of these things. Is there any beef story that we need to watch?

[Peel] Oh, absolutely. You know, if we did not have the domestic markets and the record prices that we've seen in the U.S., we would be talking a lot more about the impacts on beef markets from the loss of the Chinese market. And so, you know, they were our third have grown in the last few years to be our third largest export market. And I combined China and Hong Kong data together because you can't really separate them at some level. Right now, they have dropped to the sixth place. Well, in the month of July, which is the last trade data that I have, they were the sixth largest exporter. And if you take Hong Kong out, and that's because of all the transshipment stuff. China, mainland China by itself was 1.2% of our beef exports in the month of July. So if we would be talking a lot more about the impacts of the tariff situation on beef exports to China, other than the fact that our domestic market situation is really masking those those impacts right now, and we're sort of just glossing over them at this point.

[Yeager] We've glossed over a lot. And unfortunately, I might have to gloss over this last thing. One thing that Matt Bennett brought up on the show last week was, cool. Mandatory country of origin labeling. Does that topic get brought up right now because this is the chance to talk about it, or is that still going to stay off to the side? We're not going to address that issue right now.

[Peel] Well, I think it gets brought up because in some quarters it's a perennial topic. And, and it just won't go away. I don't know. Again, in this political environment, I, you know, and I can't figure out cattle markets, let alone politics. So I don't have any idea whether anybody would pick up on it. You know, again, USDA is kind of throwing stuff at the wall to see what sticks. They want to be able to say they're doing something about this market situation, when in fact, we just discussed the fact that there's really nothing they or anybody else can do. But that doesn't mean they're not going to try some things. So could it come up possibly. You know, it's pretty clear. I mean, you know, MCOOL adds cost to the industry that everybody will absorb at some level. Research that was done a long time ago when this was a hotter topic and at least for longer periods of time, never showed any definitive demand, value of imports. Consumers just really don't care for the most part, relative to price and what the product looks like and tastes like. And so, the short answer is it's probably a negative impact on the industry. If we were to try that again, not to mention all of the trade impact implications of it, depending on how it would be implemented. But, you know, it's, it's, so it's an opportunity to talk about it at least from some people's perspective. But it's not really anything more than any of these other things in terms of a solution to our issues.

[Yeager] I think the last time we talked, I asked, who's been the winner in these higher prices, in these higher markets, at least in the future markets. And I think it was cow calf. Did anybody win last week?

[Peel] Nobody won last week. You know, and obviously cow calf producers have been the target of this market's focus trying to incentivize herd rebuilding. They probably took the biggest hit in a relative sense simply because of that. You know, but, and then everybody above them is a margin operation. And so the margins have all been in various states of squeeze. Obviously up to this point through the last 2 or 3 years. The last two years in particular, Packers have taken the brunt of that margin squeeze and continue to do so. Feedlots have actually done pretty well through most of this, because the sharply trending market higher, gives them enough time between when they buy relative expensive feeder cattle and when they sell feed cattle. Six months later or eight months later. The market kind of offsets part of that lousy buy sell margin. If we slow down the rate of price increase, which I sort of expect to happen, even though I do think it's going to work its way higher, external stuff notwithstanding. But, that might change a little bit.

[Peel] I think feedlots are going to face more, and they're certainly going to face more challenges going forward with lack of feeder cattle as well as the cost of those feeder cattle. Now, obviously, a bumper corn crop and the cost of grain and feedlots helps and has helped a lot over the last couple of years, and it will continue to help to some extent. But, I don't think as we go forward, I expect feedlots to sort of share more of that margin challenge. For the rest of the industry. Stocker guys are already pretty well squeezed because they're paying record high prices for calves, and feedlots are bidding more and more of the cattle end of the feedlots earlier at lighter weights. And so Stocker guys are trying to find a little place to work in here. And it's pretty limited right now. And even the retailers I think will see their margins tighten up more as we go forward. Beef production is falling. I don't think retailers have had to pay up on the front end as much as they will going forward with tight beef supplies. And of course, their ability to pass that on is somewhat limited. So they'll have to absorb part of those, higher, wholesale prices as we go forward. And the squeeze at that level will get a little bit more severe.

[Yeager] See, that was going to be what we were going to talk about in the winter. I had this whole thing. We're going to have to discuss the retailer. I've been building a list for the next time we talk. I just didn't think it would be so quick that we'd have to talk. Derrell , I appreciate your time. As always, thank you so very much for trying to help understand a broader audience, because I know there's a broader audience watching what we're doing right now, and I wanted to make sure that you were able to help us out and understand it.

[Yeager] Thanks, Paul.

[Peel] You bet. I am very happy to be here and visit with you.

[Yeager] If you have feedback for me, send it in an email market to Market at Iowa pbs.org. New episodes of this podcast come out each and every Tuesday. We will see you next time. Thank you so very much. Our production crew at Iowa PBS is led by Sean Ingrassia, Reid Denker, Neal Kyer, Kevin Rivers, David Feingold, Julie Knutson help make this possible each and every week. Thank you.