Why America's Cattle Ranchers Keep Getting Squeezed

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2:35Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, what do you eat more of? Eggs or beef? You know, I was just thinking, I want to eat more beef in my life. I probably do eat more eggs, ultimately. But, like, beef is just so good. Beef is the best food there is in the entire world. I truly believe that. And every time I eat beef, I think about, why don't I eat this all the time? It's so good. It's so satisfying. And all these nutrients. I don't have this impulse to snack and eat garbage afterwards. I want to eat more beef. I'm pretty sure I eat more beef than eggs at this point.

3:12I will have the occasional omelet and I mix a lot of eggs into like Asian noodle dishes and things like that. Yeah, I get that. But not that many. I aspire to have the Tracy Alloway diet. Okay. Well, speaking of beef. Except it's really expensive these days. Yes, this is exactly it. So I'm sure everyone listening to this podcast at this point has heard about rising beef prices in the U.S. There are a lot of headlines flying around constantly in recent days about this. So, for instance, we're recording this on October 30th. And earlier this week, President Trump was tweeting about how he wants beef prices to be lower.

3:50He's also been talking about buying beef from Argentina. Yeah. It is very much in the news. There's also the whole soybean drama with China. Yeah, there is. I think it's funny because in that Trump post, he said cattle ranchers should appreciate how good things are going because high beef prices bring them down. There's just a lot. And I've said this before on the show, which is that I think the ultimate marker of civilization is the amount of beef or protein that you can buy with an hour's work, that the median person or the average person can buy with an hour's work. And I think when it's going backwards, we should be very disturbed.

4:28So setting aside, I'm very fortunate. I can probably afford to eat as much beef as I want. But the price of ground beef, I'm looking it up on the terminal now. It's like tripled since 2010. It was like$4 around the pandemic. Now it's over$6. I think these are extremely serious issues. I will say I don't think we need to be quite as obsessed with protein. Americans especially. We already eat a lot of protein. Eat more fiber. I'm not saying we need to be obsessed. Actually, I do think the protein craze may be a little out of hand. I just think this is like a very good measure of the advance of sort of a wealthy society that protein gets more affordable.

5:04I'm going to get you a cow share for Christmas. Thank you. All right. Well, I am happy to say we do, in fact, have the perfect guest. We're going to be speaking with Bill Bullard. He is the CEO of RCAF USA. So, Bill, thank you so much for coming on Odd Thoughts. Glad to be here. Thank you. Thank you also for actually looking the part of a cattle rancher. We really appreciate that. No one can deny that we're talking to the perfect guest. All right. So why don't we start really simple? What have you observed about beef prices just in the past few months or so? Well, we've seen beef prices increasing, as you've indicated, and we see cattle pricing also increasing, as you indicated.

5:44So we now have a positive relationship between the price of beef and the price of cattle. And we are a competitive industry. We do not rely on government price supports. We're the single largest segment of American agriculture. The cattle industry generates about$100 billion a year in cash receipts. So it's larger than any other commodity, corn, wheat, cotton, dairy. And we rely on competitive market forces. But we have not had competitive market forces until very recently. And that's where we need to get into the history of why beef prices are high. Can I ask very quickly, you said there's now a positive relationship between cattle prices and beef prices.

6:25Is that not always the case? That certainly has not been the case, especially since 2015. we saw an inverse relationship. We saw beef prices heading skyward beginning in 2017. And while beef prices were increasing, cattle prices were falling. And this is really odd in an industry where the only ingredient in beef is cattle. So you would expect there to be a harmonious, synchronous relationship, a positive relationship between beef prices and cattle prices. One of the things I discovered on the terminal back during the pandemic, I learned all these things. We actually have an index on the terminal, the hedger's edge beef packer margin, which I imagine to some extent reflects that spread.

7:11And we do see it rise generally up really through 2021. It's actually started to compress quite a bit. But just actually, why is that like what explains why these things can move in different directions? What is the added factor in the price of beef that is not the price of cattle? So let's go back to just over a generation. We'll go back to 1980. At the time, we had 1.3 million beef cattle farmers and ranchers in the United States. We had about 37 million cows in our mother cow herd. Beef prices that consumers paid were about$2.40 per pound. At that time, we had the four largest packers in the industry controlling 36 % of the industry.

7:54So if we think about how the beef industry works, it's the consumer beef dollar that has to be allocated along the entire supply chain. So back in 1980, every time a consumer spent a dollar on beef, that dollar was allocated by competitive market forces. And over 60 cents of that dollar went back to the live cattle producer, the farmer and rancher and the cattle feeder. And less than 40 cents went back to the processing part of the beef industry, and that's to the retailer and the packer. So the producer was receiving the majority share, which made sense because they kept that animal for 15 to 18 months before it was slaughtered and converted to beef.

8:37And the beef packer only kept the animal for about seven days, and the retailer kept it for the shortest amount of period possible. But the point was, is that when consumers were paying$2.40 per pound for beef, $0.60 of that dollar was going back to the producer, and only less than$0.40 was going back to the processor and the retailer. Now jump ahead today. We've wiped out over half of all the beef cattle operations in business just over a generation ago. We've lost 52 % of them. We've wiped out 25 % of our mother cow beef herd, And the four largest packers control today about 80 % of the marketplace.

9:18And consumers in 2024 paid about$8.23 per pound for beef. And now in 2021, just a couple of years ago, the allocation that the competitive market was making in the marketplace was completely tipped on its head. In 2021, the packer and the retailer received over 60 cents of every consumer beef dollar. and the producer received less than 40 cents. So here's the question. How in a competitive market could that have happened? How could a competitive forces in the marketplace completely reversed the competitive allocation of the consumer beef dollar within the entire beef supply chain? The answer to that question is it can't.

10:03If our market was competitive, that could never have happened. That raises the concerns that we've been struggling with for the past several decades. Our industry is in a state of crisis, and it has been. And what has happened is, is because of industry concentration and consolidation, the ability of the multinational meatpackers and retailers to exert buying power upstream in the supply chain, and the fact that we've entered free trade agreements that have allowed the meatpackers and retailers to access beef from around the world and displace domestic production because the beef that we import from Argentina, Brazil, Uruguay, Nicaragua, Costa Rica, Australia, New Zealand, Canada, Mexico, it's a perfect substitute for domestic product.

10:51So the more we import, the less we have the ability and capacity to maintain domestic production of this very important protein source, which is beef. And so what we see today is a dysfunctional marketplace, as I described before. Since 2017, we saw beef prices going up that consumers were paying in the retail store. We saw cattle prices going down. The latest census shows that just in the five-year period from 2017 to 2022, we lost 106 ,000 beef cattle operations. Farmers and ranchers exited the industry during that period. And the reason that that's happened is because they've suffered long-term lack of profitability.

11:34It's because their market is dysfunctional. It's because imports have displaced our domestic production and our opportunity to expand. And now we've hit a huge market shock, an economic shock to the market. And that was the latest drought that occurred in the latter part of 2020. This is what I was going to ask. So we're going to talk more about industry consolidation for sure. And, you know, I'm looking, for instance, at a headline right now about Walmart tightening its grip on the beef market by setting up a new plant. But just to play devil's advocate for a second, how much of this is just down to pure input costs like grain going up or, you know, the drought that you just mentioned or labor costs?

12:18At least especially the move that we've seen over the last year, which I'm sure which cannot obviously be explained by multi-decade trends. So what we've seen is our cattle supplies have tightened to the lowest levels in 75 years. So we have extremely tight supply situation, but we have incredibly strong beef demand. Consumers' willingness to pay for beef appears unbounded as prices have increased. Consumers have still cleared the grocery store shelves with the product. And so the latest drought that occurred had accelerated the ongoing liquidation of our U.S. beef cattle inventory. And that's why our supplies are so tight.

12:59And yet you've got incredible consumer demand for beef. And so we have seen a spike in prices because of that strong demand. Consumers continue to be willing to pay more for beef. But that is not how our market has been functioning for the past decade. Let's say the rain comes back, there's no drought, et cetera. What are we talking about for a timeline? Again, setting aside the structural things, what are we talking about for a realistic timeline for getting back to where we think like, oh, we are comfortable with the level of cattle stock that we are happy with the level of cattle stock that we have in this country?

13:35Right. So we currently produce about three billion pounds less beef than what is consumed in America. So the largest segment of American agriculture actually underproduces for the domestic market. And because of the long biological cycle of cattle, it takes about three years to decide to hold back cattle to breed and then to have a calf and then to raise that calf to slaughter weight over a period of 15 to 18 months. And so in order for our industry to begin an expansion phase, we would need a price point that incentivizes producers to make the investment to build a herd. And unfortunately, that price point occurred back around 2023.

14:19We should be in an aggressive expansion phase now, except that instead of domestic consumers relying on U.S. producers, we've increased the volume of beef imports to record volumes in 2024. That's displacing our domestic production. And that increase of imports is not distinguished in the marketplace. Consumers can't tell if the beef they're buying is foreign beef or domestic beef. And so that puts the power and control in the hands of the packers and the importers and retailers and not in the hands of producers. So your question was, how much of this had to do with increase in input costs? Well, the increase in input costs reduces the margin that U.S.

15:03cattle producers receive at any given price point. And we've seen increased production costs, certainly. But the point is, is that cattle producers do not set the price of beef. The price of beef is set by the packers and the retailers who sell to the consumer. The producer is a price taker in this market and has been for decades. They have cattle, they offer them for sale, they accept or reject a bid by the packer, and they're producing a perishable product. So when an animal is ready for slaughter, ready to be fabricated into a beef product, the producer who fed that cattle has a two to three week window in which to market the animal, Otherwise, it degrades in quality.

15:43It adds fat instead of muscle. And as a result, the producer has very limited bargaining power in a highly concentrated market as we have now. And when they're selling into a market that's controlled, where forked packers control 80 % of the market, they are victims of the abusive market power that emanates inherently from such a highly concentrated marketing structure. So the increased production costs reduce the profitability of producers, but it doesn't affect the producer's ability to market cattle. That would be the demand for live cattle, and the demand for live cattle is offset and undercut by increased volumes of import.

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18:16What's the relationship between beef availability and the dairy industry, dairy cows? So the reason I bring it up, Joe's going to get sick of me mentioning this, but I've been reading this like 70-year-old book on small-scale farming. I hate when people are always bringing up books that they read. I know. Isn't that crazy? No one should ever bring it up. No, I said joke. And, you know, there's a chapter in it about whether or not you want to go into cattle ranching for beef or if you want to raise dairy cows. And one of the things that you learn from this is that every dairy cow usually becomes a beef cow at some point.

18:52Once its milk production starts to dry up, it usually gets sold for slaughter. So what's the relationship or the interaction like there? Well, historically, what you described is true. As the dairy animals have exceeded their production lifespan, they are marketed as call animals into the beef supply chain. And it's a very lean meat product that is mixed with the higher quality trim that we obtain over our grain fed animals that are fed in feedlots produced exclusively for beef. So there wasn't much competition between the beef industry and the dairy industry. But here recently, as we've increased our technology and genetic abilities, we have begun to raise more male dairy animals and are bringing them into feedlots and feeding those animals.

19:45And they are now beginning to compete with the beef cattle farmer and rancher in the marketplace. And this is a relatively recent phenomenon that's been occurring in our industry. Wait, why is that happening? Yeah, say more. Well, it's happening because there's a profit opportunity to sell dairy cattles into the beef supply chain. And of course, that will compete directly with our America's farmers and ranchers, who not only will have to now compete with this increase in the dairy beef sector, but they're already dealing with this undifferentiated, cheaper import flood that has been negatively affecting their profitability in this industry.

20:24Say a little bit more about, OK, cattle prices have gone up. And so in theory, as you said, in theory, that should incent more investment, et cetera. Talk a little bit more about some of the input costs that a cattle rancher faces when making these decisions to expand their stock. So one of the first factors is the availability of sufficient land to raise the animal because in the beef cattle industry, the animal is primarily raised on grass. After a calf is born and it suckles the mother for about four to six months on grass and before it is moved downstream in the supply chain to become a yearling animal and ultimately delivered to a feedlot where it's fed until it's slaughtered weight.

21:11And so the input costs include the fuel with which to run an operation. It includes the veterinary expenses for keeping your animals healthy. It includes the land costs of maintaining sufficient forage supplies for the animal. It includes the cost of equipment to put up hay and grain with which to feed those cattle. And in many instances, it includes labor. However, most of the family farm and ranches here in the United States are just that. their family farms and ranches attempting to raise cattle. And they're experiencing increased input costs. You know, we could talk about fertilizer costs too as well.

21:51But ultimately, the costs have increased due to inflation. And that squeezes the margin that they receive at whatever price point that they're experiencing in the marketplace. In terms of industry consolidation, the fact that there are basically, you know, for gatekeepers to beef processing in the U.S. How did we actually get here? Well, we got here because we were lax in enforcing our U.S. antitrust laws. The Sherman Act of 1890, the Clayton Act, I think of about 1914. Sherman Act, Clayton Act. Those acts. Sorry, the last time we spoke about eggs in a big series about chicken, we talked a lot about antitrust.

22:33Right. And that's a huge problem. In fact, it's no coincidence that as beef prices are increasing, we just saw a settlement in a national class action suit in which two of the largest packers, Tyson and Cargill, have purportedly agreed to settle the consumers' complaints about beef price fixing to the tune of about$87.5 million. So what we have in our industry is a decades-long lack of enforcement of antitrust laws. That allowed the meat packers back in the 1980s to engage in what was called merger mania. We saw an unprecedented amount of mergers and acquisitions in the beef cattle industry. And it was through that process and no enforcement of antitrust laws that the meat packers were able to achieve this extremely high level of concentration.

23:24And in addition to that, Congress realized over 100 years ago that independent livestock producers were really vulnerable to the monopsony power, the buying power of the concentrated meat packers. So they passed what was called the Packers and Stockyards Act in 1921. And this was to ensure that the meatpackers not only could they not engage in antitrust activities such as monopolization and price fixing, but this act also said they couldn't engage in practices of procuring livestock from producers that was patently unfair. And so this important act actually helped to bolster the United States' ability to ensure antitrust violations were not occurring in the marketplace.

24:12And it gave the independent producer recourse in the event that they were treated unfairly or deceptively by the concentrated market. The problem is, just like our antitrust laws that collected dust on the shelf, so too do the Packers and Stockyards Act. And yet today, the U.S. Department of Agriculture has not promulgated the rules necessary in order to implement and enforce this over 100-year-old Packers and Stockyards Act that was intended to protect independent livestock producers from the abusive market power of the dominant beef packers. Do the children of ranchers want to become ranchers?

24:50There's a popular country song that came out in 2023 by Cody Johnson called Dirt Cheap. And the entire premise of the song is about this dad, this real estate developer offers him all this land, and he's about to take the money. And then he gets sad thinking about his kids will never be running around on this. And when I hear the song, I got a little cynical. I was like, yeah, but that daughter is going to sell the land when she gets older. So what's this? Like, she's going to move to a big city. But are there issues in your industry of like the next generation of ranchers? Like, no, I want to sell this land to a data center.

25:21I want to sell this land to a housing subdivision so that I can like go work in finance in New York City. When you have an industry like ours that has lost over half its participants in the course of just over a generation. Yeah. It's not unsurprising that the average age of the U.S. farmer and rancher is now somewhere north of 58 years of age. And we hear anecdotal information all the time about ranch families who have struggled under an economic cost price squeeze for decades. Their children have watched. They've encouraged their children to do something else other than to ranch. And that's a huge problem that we have because part of this expansion phase will require us to attract new interests, to attract aspiring cattle farmers and ranchers into the industry.

26:08That's not happening. And even though I said that the price point was sufficient to incentivize the expansion over a year ago, we're not expanding. And we're not expanding because our cattle producers have recently witnessed a complete collapse in cattle prices when we were about where we're at today. And that was just as recently as 2014 and 15. At that time, we had the highest nominal cattle prices in the history of our industry. And beef consumers were then paying the highest nominal beef prices in history. And every analyst, government and private alike, said the cattle producer is going to receive another three years of very strong prices because of that long biological cycle of cattle.

26:51This is a very, this strikes me as a very important data point. The fact that the rancher has been trained essentially to expect that high prices won't necessarily sustain themselves, right? It's the boom bust mentality. Yeah, the boom bust. We talk about this across industries. It's like great that the price is there, but is the price going to be there in three years when that cow is ready to be sold for meat? It's not enough to just have temporarily high prices. Well, that's right. And that's exactly what happened at the end of 2014. In 2015, when everyone believed that our cattle prices would stay strong, they inexplicably collapsed.

27:30And they collapsed further and faster than any time in history. And they collapsed until we hit that point in 2017, when suddenly consumer demand was driving beef prices higher and the meat packers were paying less and less for cattle prices. And so we had this inverse, completely dysfunctional situation in the marketplace and producers were herding. That's the period we lost 106 ,000 producers from 2017 to 2022. And only now, after this latest drought that we shrunk the herd size to such an ultra low level, have we seen the cattle prices begin to once again respond favorably to the latent forces of competition in the industry.