Year of Hope and Prosperity Crushed, but New Opportunities Emerge
When 2020 started, we all had a lot of hope going into the New Year: unemployment was at a record low, the economy was humming along, and opportunities abounded everywhere. Literally overnight, an invisible enemy, coupled with a situation we have not seen in our lifetimes, seemingly destroyed that picture of prosperity. Standing in Fischer’s Meat Market, my local grocery store, I see empty shelves on every aisle. Prices of food have increased sharply (although it seems they are starting to come back down). The normally full carts that I’m used to seeing are relatively empty from the restrictions placed on consumers. I understand why the average consumer thinks that farmers and ranchers are making a windfall profit in this crisis. That assumption could not be further from the truth. A very real and dangerous threat has emerged from this quarter of destruction which may have long-lasting consequences to our farmers, ranchers, and fragile food supply system. Despite the bad news which is happening, I truly believe that a Golden Age is coming. Agriculture has a unique opportunity to change in a big way towards the better, and I think each of you reading this can be a tremendous help in building a new Shop Local movement.
The Infamous Oil Contango of 2020
On April 20, 2020, crude oil fell into negative territory on the Futures Board, dropping to nearly $-40/barrel. The Futures Board allows producers and consumers to buy a commodity at a certain price at a certain time. Oil has contract deliveries every month of the year. For instance, an oil producer may see that oil is trading at $40/barrel 6 months in the future. That same producer may elect to go ahead and sell a contract of oil (500-1000 barrels depending on the size of the contract) while a buyer will take delivery of that oil in the contract month at that price of $40/barrel. It works well until an unforeseen threat destroys the market for the commodity, which in this case is oil. As the demand for oil instantaneously dropped globally, the world began running out of places to store the excess oil. When it came time for producers to deliver that contract of oil, the buyers could not take delivery because there was nowhere to put it, and they had to pay the producers to keep the oil. Some ended up selling their contracts for -$37/barrel when they bought it at $30/barrel several months ago. That is a -$67,000 swing on only one contract! Multitudes of investors and speculators took a huge hit on that Monday as the brokerage firms forced long positions to sell and roll into the next month. It makes me sick to think about how much money was lost on that Monday.
If you look at the futures board, you can see that oil for June 2020 is in the mid-teens ($17/barrel as I write this), but further out, June 2022, oil is priced in the mid $30’s. This phenomenon, where near-term contracts are priced lower than those further out in the future, is known as a Contango. This means that many inefficient producers will struggle to remain solvent in the next few months. When they go under, some production capacity will disappear in the mid-term, resulting in higher oil prices...eventually.
A Contango in Cattle Prices?
The oil contango is extremely dangerous for the economy, and a similar situation is happening in the cattle market. If you look at the current futures board for Live Cattle, you can see a contango building in cattle prices. As of this writing, Live Cattle delivered in June 2020 are priced at about 82 cents per pound, while cattle marked for delivery in February 2021 are priced at $1.05 per pound. That is a $300 difference for a fattened steer or a $9,200 difference for a load of cattle. Multiply that difference by several million head of cattle, and you can see the losses are mounting for ranchers and feedlots. I think we all understand why oil is currently in contango; it makes perfect sense. But why are Live Cattle forming a contango? Stores are struggling to keep meat on the shelves and prices are high in the supermarket, so why is beef on the hoof priced so low right now?
The answer lies in the infectious nature of the COVID-19 virus. As workers at the slaughter and processing plants become ill with the virus some of those plants shut down. There are four large companies who control roughly 80% of our country’s slaughtering capacity.[1] When one, or several, of those plants shut down temporarily because of the virus, demand for live beef also goes down. Feedlots get stuck with cattle ready to be slaughtered that instead need to be fed, watered, and cared for by the people working at the feedlots. This backlog causes near term cattle prices to collapse for producers, while the consumer sees rising beef prices at the store because not enough cattle are being slaughtered to meet the demand. It’s a case of deflation in one sector and inflation in the other – crazy, right?
What does the future hold for farmers and consumers?
Honestly - things do not look that great at least for the next few months. Chad Felderhoff, a friend of mine and the local business owner of Muenster Milling is extremely smart on these issues and does a great job explaining them on his recent Facebook videos. Supply chains are being disrupted because everyone is staying at home. Chad has seen spot prices double for the products he needs to make his Muenster Natural Dog Food, and that is just one microcosm in the supply system. Unlike oil, Cattle Prices will not go negative. A buyer can always take delivery, euthanize the cattle, and bury them in a ditch. It sounds callous to say, but it’s already happening with the pork industry.[2] It is unfortunate to see needed meat and protein being wasted.
For farmers and ranchers, this Contango in meat prices will be difficult in the near term and potentially devastating in the long term. Most farmers currently operate on a line of credit to the bank. When beef prices drop sharply, these loans often don’t get paid back. Banks lose money. Farms go under. And sometimes, foreign investment firms gobble up our precious farm and ranch land. Prices were extremely low at the start of this virus. Now? I fear this could be the knock-out blow for many farmers and ranchers. Look at the continuous chart for Feeder Cattle shown below if you don’t believe me. In 6 years, prices have gone from all time highs approaching $2.40+/lb for Feeders to close to most recently, $1.00/lb! To put that in perspective: a 700 lb steer would fetch about $1,875 during the market rally, and now it would trade close to $700. I cannot emphasize enough how devastating the price collapse in the past few years has been for us ranchers. Those of us on the cow-calf side of things who are efficient have a break-even cost around $800/cow of which $200 is the labor we pay ourselves. Wages are now effectively cut in half because we are losing $100+ per head. Producers who are less efficient are losing much, much more.
Monthly Continuous Feeder Cattle Futures Chart
I feel for consumers because beef prices have not come down at the stores from record highs. It’s easy to blame the packers and middlemen in the industry, but they will also be suffering because they have plants closed. Nobody is winning right now! It’s all a terrible, terrible scenario. Words cannot describe the pain caused to a 5th or 6th generation farmer/rancher who loses his livelihood. Through no fault of his own, a century long legacy is taken away in a flash. Generations of work…gone! Is it any wonder that farmers/ranchers are at high risk for suicide?
Some of these farms and ranches will be replaced by more efficient producers. Some won’t be replaced. Who is going to fill that gap? I'm betting Mexico, Canada, Brazil, Argentina, and Australia would love to raise beef for us. We have some of the most productive farm and grass lands in the world; quite frankly, it would be pathetic to import more beef when we can raise plenty for ourselves right here in the USA. This pandemic is making us all question our dependency on other countries to produce our goods. What happens if we rely on other countries to raise a significant portion of our beef and another pandemic or global catastrophe strikes – how would that affect our supply of beef? Little or no beef at the supermarket and assuredly higher prices. It’s something to think about.
What, if anything, can a consumer do?
SHOP LOCALLY! It is truly that simple. Did you know that the US imports about 300 million pounds of beef a year?[3] Unfortunately, when you go to the store, you might find a package of beef that says “Product of the USA”. That beef with that label may have originated in another country.[4] Shopping locally means finding a local farmer/rancher and doing business directly with him or her. For seven years, Lucas, Dad, and I have marketed our Muenster Grass Fed beef directly to our customers as live animals. When the time is right, we take those cattle to one of our local processors: Fischer’s or Hess Meat Markets. Then, local people, who we know, slaughter and process the animal. If every community were blessed to have processing plants like Muenster, we would not be having this supply crunch, and there would not be shortages of meat at your local grocery store. A hundred small plants could potentially be shut down during a time like this, but the thousands not shut down would be able to keep up with demand. As it is now, if only a handful of big plants shut down, our supply of beef in the supermarket gets disrupted and prices go up for consumers. Shopping locally and building local businesses will bring resiliency to our economy and the supply system.
A pair of grass finished rib-eye steaks from one of Muenster Grass Fed's Cattle
Even if you can't buy some of your food from a local farmer/rancher, there are still many things you can do to help. Facebook has created an amazing system to help small businesses advertise their products. Farmers are beginning to see this as an opportunity to get the word out. When you see a local farmer post his/her product on Facebook, please share it with your friends. Spread the word about how farmers you know are trying to make a living selling their food directly to customers. Encourage farmers to start selling directly to consumers. These concrete actions will help build this Shop Local movement in agriculture.
I really think, with your help, a Golden Age will develop in agriculture. Locally grown food coupled with direct marketing will really help farmers stay in business while offering healthy produce, protein, and dairy to customers in their community. I cannot tell you how much a simple Facebook share can help a business get noticed. Just the other day, my sister-in-law posted about the strawberries at Demases Farm in Boyd, Texas. I had never heard of them, and I didn't know we had a strawberry farm so close to where we live. Now I know, and there is a good chance, I will take my family there to get some fresh strawberries next year when they are in season. These opportunities to help exist for all of us on social media. Let's take advantage of them, and let's help our local farmers, ranchers, and local businesses make a living doing what they love. Working together is a win-win for everyone! Resiliency is brought into the system, farmers are able to keep their farms, AND consumers will have a stable supply of meat from sources they know and trust.
Be informed. Shop Locally, not Globally. Shop Muenster Grass Fed.
Sources:
[1] https://www.hcn.org/issues/43.5/cattlemen-struggle-against-giant-meatpackers-and-economic-squeezes/the-big-four-meatpackers-1
[2] https://www.bloomberg.com/news/articles/2020-04-23/some-canada-hog-farmers-have-culled-pigs-with-prices-in-freefall
[3] https://www.statista.com/statistics/194702/us-total-beef-and-veal-imports-and-exports-since-2001/
[4] https://www.ecowatch.com/country-of-origin-labeling-meat-2572003641.html
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