Question for MWJ and SH

[DiamondSCattleCo]

Since its probably going to get lost in the other thread, I'm going to pose a few questions to either one of you:

You have a livestock market on a given day with two major packers, each of whom have 20,000 head/day capacity. You have 5 smaller packers, one at 2500 head/day, one at 1500 head/day, 3 others at 500 head/day.

Packer A - 20,000 head
Packer B - 20,000 head
Packer C - 2500 head
Packer D - 1500 head
Packer E - 500 head
Packer F - 500 head
Packer G - 500 head
Total slaughter capacity - 45,500

On a given day, exports run about 5000/day.

We're now up to 50,500 "marketplace capacity". Call it demand.

Our supply of fat cattle in this market is 40,000 animals.

In effect we have a situation where demand is outstripping supply. Now for the questions:

1) What happens when Packer G drops their bids in the system?

2) What happens when Packer A drops their bids in the system?

3) What happens when the supply increases to 60,000 fats? Supply is now outstripping demand.

4) Assuming supply increases to 60,000 fats, what happens when Packer G drops their bids?

5) Assuming supply increases to 60,000 fats, what happens when Packer A drops their bids?

When responding, assume that exports can and will move around about 10% to accomodate excess supply or excess demand. But never more than 10%, since exports require other static resources that cannot increase on a daily basis (shipping is a big one).

Rod

 

[mwj]

Rod what do you mean when you say they ''drop'' there bid? Do you mean they are out of the mkt. for the day or they are lowering there price?

 

[Jason]

Number 1 Rod, you need to restate "demand". Just because a packer has capacity doesn't mean that is demand.

If in your scenario we can assume they have markets for their entire capacity, and those markets are static during this exercise then certian assumptions can be made. Otherwise there are far too many variables to address what may happen.

Demand aside, supply never could increase by 1/3 in quick fashion without market signals.

Other variables like niche markets for 500 hd packers would likely come into play.

If those variables are considered then 1 of the large packers wouldn't 'drop' their bid unless they were full. Being full they lower the supply to 20,000 head for the remaining packers to fight over.

Next variable is what quality are all the cattle? Exactly equal? That doesn't happen in real life, but it needs to be considered.

One other variable, what margin does each packer need to remain viable?

I have never heard of a plant big enough to handle 20,000 hd per day, how many plants are we talking?

 

[RobertMac]

I'll be your huckleberry...

1) What happens when Packer G drops their bids in the system?

They get no cattle bought

2) What happens when Packer A drops their bids in the system?

They buy the bottomend(quality) cattle

3) What happens when the supply increases to 60,000 fats? Supply is now outstripping demand.

Everyone gets their cattle bought at lower prices

4) Assuming supply increases to 60,000 fats, what happens when Packer G drops their bids?

They buy the bottomend(quality) cattle

5) Assuming supply increases to 60,000 fats, what happens when Packer A drops their bids?

They buy the bottomend(quality) cattle

 

[DiamondSCattleCo]

Rod what do you mean when you say they ''drop'' there bid? Do you mean they are out of the mkt. for the day or they are lowering there price?

Sorry, MWJ, I used poor wording. I mean when the packer exits the market for that day. Although if you simply want to use dropping bids in the proper sense of the term, thats fine. The effect will be the same, only to a lesser dollar value.

Rod

 

[Sandhusker]

Let me take a stab

1) What happens when Packer G drops their bids in the system?

Nothing. The market barely takes notice. Why would they?

2) What happens when Packer A drops their bids in the system?

Everybody drops their bids. It is now a given that nearly half of the cattle will be bought for a lower price. Who wants to go against that?

 

[DiamondSCattleCo]

1) Number 1 Rod, you need to restate "demand". Just because a packer has capacity doesn't mean that is demand.

2) Demand aside, supply never could increase by 1/3 in quick fashion without market signals.

3) If those variables are considered then 1 of the large packers wouldn't 'drop' their bid unless they were full. Being full they lower the supply to 20,000 head for the remaining packers to fight over.

4) Next variable is what quality are all the cattle? Exactly equal? That doesn't happen in real life, but it needs to be considered.

1) We're talking a single day market. Demand, consumer demand that is, is static. Since Canfax reports less than 1% packing waste, we're safe to assume that the packers are meeting demand running at their given capacity. Even if this isn't full tilt, in the short run, they can't increase capacity since it takes more than 1 day to hire staff, or even start up shut down machines.

2) I'm not talking about a single day increase to 60,000 fats. I'm not even really talking about moving from one state to the other, but rather a completely different set of circumstances on one given day.

3) Exactly. The packer is full, therefore they exit the market. Certainly not uncommon to see.

4) All shapes and sizes of fat cattle. General marketplace conditions. But what I'm getting at is whats going to happen to the average price of fed cattle given the market conditions? If the packer that exits the market only seeks a certain kind of cattle, but other types of cattle have equal demand, its still going to change the average fed cattle price.

Rod

 

[Jason]

If the packer that exits the market only seeks a certain kind of cattle, but other types of cattle have equal demand, its still going to change the average fed cattle price.

There is the crux of the issue. All cattle of different quality DO NOT have equal demand.

If a large packer in either of your supply numbers is full of their type of cattle, the remaining packers compete for the highest return cattle that are left. The remaining packers need to fill with the best cattle they can get. There are less cattle left and they still need them all.

If there are more cattle than packer space the price will drop on the bottom value cattle first. There could be a time where the worst cattle would not even be bid on. That however would allow a chance for a packer to expand their kill and bid the poorest cattle for a cheap price to use as grind or something similar. However that won't last long as the ones supplying that type of animal would likely go broke.

Trying to squeeze your scenario into a 1 day offering is silly, because an oversupply of 10,000 head or more is unlikely. fats are not a 1 day only deal. They can be harvested from 1000-1500 pounds live and still hit the targets. At an average daily gain of 3 pounds, that's a 166 day window. Granted not all cattle will be opitmal during that entire weight range, they still have some flexibility.

Packer space in North America was very close to production capacity. BSE has messed with the numbers somewhat, but that is a very unusual situation and is correcting itself.

You are trying to make it seem like packers can invent owned cattle whenever they like just so they don't have to pay top dollar from feedlots. I wish I could do that, but no one can.

Feedlots always let us know when they are losing money, but we never hear about the times when they are making money. I told a long time feeder one time when he was complaining about how much he was losing per steer that he was too smart of a businessman to lose more when he lost money than he made when he was making money. He just looked at me and grinned and said I was right. He has never complained how much the losses are on fed cattle.

If we go back to your scenario, and the smaller packers need $40 a head to survive, and the big ones need $20, The biggest packers will only have to pay 1 cent more than any other bid to get the best cattle bought. The 2 biggest packers will compete on the very elite cattle and might step aside if distance is a make or break deal.

If one is full, the other only has to bid 1 cent more than the smaller packers will pay on the best cattle left.

If the best cattle are worth $50 more than average and the worst are $50 less, the smaller packers will bid up to $10 per head higher than average to try to own the best cattle. The big packers will be able to bid $30 above average to own them.

Its pretty easy to say the big packers will own the best cattle under this scenario. They have $20 more they can spend.

The small packers might get left to buy the below average cattle. They will bid $100 per head less than the best cattle, or they will lose money. The big packers are full so they can pay less.

You as a small feedlot might really grumble that you got $100 less than your big neighbor. Those damn little packers...... :lol:

 

[DiamondSCattleCo]

1) There is the crux of the issue. All cattle of different quality DO NOT have equal demand.

2) If a large packer in either of your supply numbers is full of their type of cattle, the remaining packers compete for the highest return cattle that are left. The remaining packers need to fill with the best cattle they can get. There are less cattle left and they still need them all.

3) Trying to squeeze your scenario into a 1 day offering is silly, because an oversupply of 10,000 head or more is unlikely.

4) You are trying to make it seem like packers can invent owned cattle whenever they like just so they don't have to pay top dollar from feedlots. I wish I could do that, but no one can.

1) What I meant by equal demand is that all other types of cattle would see their normal demands. If a packer that buys culls exits the market, that isn't going to cause much demand shift on high end cattle.

2) The packer was never in the market that day.

3) We currently have an oversupply of animals in Canada. On any given day, we have an oversupply of fed animals. Saying that we have an excess supply of 10,000 head is not remotely silly. Even if those 10,000 don't sell on a particular day, they're still there the next day and will eventually need to be moved out. Its a perfectly valid assumption used in economic exercises.

4) Huh? I'm trying no such thing. Packers have animals on feed throughout the year. Eventually those animals will need to be slaughtered.

The purpose of this exercise was to illustrate to SH and MWJ how the Canadian marketplace is right now. We have two major bidders and a few little fellas, and we have an oversupply of animals for current demand. When one of those major bidders leaves the market, what happens to the average price? I pegged exports at a max 10% increase, which is likely high as I don't think there would be enough surplus trucking in Canada to handle a 10% increase in exports in the short term.

Rod

 

[Jason]

Rod, Canada has an oversupply of OTM cattle.

We can't supply enough age verified cattle to fill Japan, and the margin on domestic UTM is pretty sick because old cows make cheaper burger than OTM or UTM fats do, and OTM fats make cheaper muscle cuts of beef than UTM right now.

The majority of UTM cattle are shipping South because of the higher bids the US plants are offering.

We have 2 major players that have to compete with US bids. An UTM fat shipped South will be worth more if processed in the US because it can be graded by the USDA. Canadian beef cannot and does not carry a USDA quality grade.

The boxed beef price is still determining the price packers pay.

 

[Anonymous]

1) What happens when Packer G drops their bids in the system?

Other packers pick up the slack.

2) What happens when Packer A drops their bids in the system?

If Packer A has their needs fulfilled, obviously there is a shortage of cattle available for the remaining packers and they will bid accordingly.

3) What happens when the supply increases to 60,000 fats? Supply is now outstripping demand.

Packers increase their shifts and chain speeds to pick up the slack or more slaughter capacity is created or more cattle are shipped to the US.

4) Assuming supply increases to 60,000 fats, what happens when Packer G drops their bids?

The other packers pick up the slack with increased shifts and chain speeds just as they DAMN NEAR DID when the Canadian border was closed. You should know that Rod!

5) Assuming supply increases to 60,000 fats, what happens when Packer A drops their bids?

Packers increase their shifts and chain speeds to pick up the slack or more slaughter capacity is created or more cattle are shipped to the US.

When responding, assume that exports can and will move around about 10% to accomodate excess supply or excess demand. But never more than 10%, since exports require other static resources that cannot increase on a daily basis (shipping is a big one).

To suggest that exports would not increase if Packer A "supposedly" dropped it's bid is insane.

Sandcheska (stab in the dark): "Everybody drops their bids. It is now a given that nearly half of the cattle will be bought for a lower price. Who wants to go against that?"

Bullsh*t!

Everybody doesn't drop their bid because if one packer is long on cattle, the other packers are usually short bought. If you weren't such a damn conspiracy theorist and knew anything about the packing and feeding industry, you'd know that.

Canadians would have the option to ship more cattle South.


What point do you think you have this time Rod?



~SH~

 

[Anonymous]

Rod: "The purpose of this exercise was to illustrate to SH and MWJ how the Canadian marketplace is right now. We have two major bidders and a few little fellas, and we have an oversupply of animals for current demand. When one of those major bidders leaves the market, what happens to the average price? I pegged exports at a max 10% increase, which is likely high as I don't think there would be enough surplus trucking in Canada to handle a 10% increase in exports in the short term."

You don't JUST have two major bidders. Any Canadian feeder has the option to send their cattle to the US if the bids are not high enough in Canada. Quit trying to spread bullsh*t!

If one of the major bidders leaves the market, it's because they are overbought meaning there is less cattle available for the remaining packing companies and the US option is always available.

Isn't it amazing that the biggest bitchers of the packing industry are not the ones who are selling fat cattle to the packers?

SAVING THE FEEDERS FROM THEMSELVES BY ROD!


~SH~

 

[DiamondSCattleCo]

1) Rod, Canada has an oversupply of OTM cattle.

2) The boxed beef price is still determining the price packers pay.

1) We have an oversupply of ALL beef, both UTM and OTM. Yes, we need more age verified beef for Japan, but to point to a small market and our failure to meet demand there and say this is common for the market is crazy. Besides, don't you feel that UTM animals count towards the average market price of fed animals? Are they not part of the supply chain?

2) You show me a graph of box beef prices, and compare that back to average market price of fed anmals please. Make sure its Canadian.

Rod

 

[DiamondSCattleCo]

1) What happens when Packer G drops their bids in the system?

Other packers pick up the slack.

2) What happens when Packer A drops their bids in the system?

If Packer A has their needs fulfilled, obviously there is a shortage of cattle available for the remaining packers and they will bid accordingly.

3) What happens when the supply increases to 60,000 fats? Supply is now outstripping demand.

Packers increase their shifts and chain speeds to pick up the slack or more slaughter capacity is created or more cattle are shipped to the US.

4) Assuming supply increases to 60,000 fats, what happens when Packer G drops their bids?

The other packers pick up the slack with increased shifts and chain speeds just as they DAMN NEAR DID when the Canadian border was closed. You should know that Rod!

5) Assuming supply increases to 60,000 fats, what happens when Packer A drops their bids?

Packers increase their shifts and chain speeds to pick up the slack or more slaughter capacity is created or more cattle are shipped to the US.

When responding, assume that exports can and will move around about 10% to accomodate excess supply or excess demand. But never more than 10%, since exports require other static resources that cannot increase on a daily basis (shipping is a big one).

6) To suggest that exports would not increase if Packer A "supposedly" dropped it's bid is insane.

Canadians would have the option to ship more cattle South.

7) What point do you think you have this time Rod?

1) Packer G is insignificant in the grand scheme. Their bid means little.

2) :roll: So you just changed the supply numbers for the hell of it? Let me guess, you didn't like the answer? If Packer G exits the system and supply hasn't changed, that leaves an OVERSUPPLY. Since you supposedly know so much about economics, what happens when supply outstrips demand?

3) So they can do this in a day? And they'll do this in the face of unchanging consumer demand? :roll:

4) Do you have any idea how long it took for packers to pick up the slack during BSE? ANY idea at all? I didn't think so. During the BSE crisis, packers that typically dealt in low value meats simply switched to high value meats since they could buy it cheaper than ever before. It was more than a year later before the packing industry expanded capacity, and we still don't have enough capacity in Canada to handle our current inventory. This is 5 years later. So they can simply increase capacity overnight, huh? :roll:

5) & 6) Once again you show your ignorance. How do packers that are already running at capacity suddenly increase capacity even higher? And why would they in the face of unchanging consumer demand.

See the other thread for my response on shipping. Since we have a trucking shortage in Canada, can trucks MAGICALLY appear out of nowhere to ship these cattle south? My 10% increase in exports was high. During the normal course of events, we simply don't have the ability to increase exports at the drop of a hat.

7) My point, which you made very well for me, is that you don't have any idea of what market conditions are like within Canada, and as such, you should shut your yap and try to learn something. If a packer leaves the market unexpectedly, prices will drop in the short term while the other packers find themselves in a short term supply surplus situation. The prices MUST drop as supply and demand require it. How much they drop will be governed by current supply surplus (or deficit) and how long a certain packer exits the market.

To bring this thread back to the other thread, if packer owned cattle are off the radar, as they are when being privately fed in smaller lots, the shock to the system would be immediate. With the Canadian market essentially being in the hands of two packers, when one of those packers leaves, its bad news for the market.

Rod

 

[Jason]

Rod, your putting in new information to match your bias.

I laid out in the beginning that we needed to know many other variables.

If a packer steps away from a market because they are full, that means they have "consumed" their share of the cattle. The remaining cattle are obviously less.

Scott did take a longer approach than you were asking for, but were trying to use a sudden increase in supply, and that doesn't happen overnight either.

The situation in Canada has been built based on the American market. It is the highest demand market in the world. The price of Canadian boxed beef is reflected by what Americans pay. If retailers can import it cheaper from the US they do, and if packers can get more for our boxed beef in the States they sell it there.

You can't disprove that Agman has called the price of fats accurately. How can he do that unless he has the information of feeder cattle and boxed beef? Some try to claim he just has an inside line and the packers just give him info. Yeah right when he has feedlot clients that would have an advantage if that were true.

If you learn the real fundamentals of the beef industry and know why different segments do what they do, you have the ability to make decisions that will keep you in control of your operation.

Things like is it wise to spend the $5000 for a share in that new venture down the road. You can look more objectively at expanding or reducing your numbers based on real information rather than what you'd like to believe.

I don't have the ability to learn Agman's 30 years of experience in watching trends from the few tidbits he graciously shares here. However it does show me that forces beyond what I might see on the surface are at work.

I still haven't figured out why packers here are agressively tryting to lock in 96 cent fats for April, it appears on the surface that cash will be similar or lower then. Some have claimed the blizzards in Colorado are doing it, but a perspective on how little the damage will be to the entire industry doesn't agree with that.

Take the packer hatred glasses off. They are good at what they do. They are not in business to keep you in business. But they are not in business to put you out of business either.

Fear of change is what drives most to blame someone for their troubles, or percieved troubles.

 

[DiamondSCattleCo]

Rod, your putting in new information to match your bias.

Take the packer hatred glasses off. They are good at what they do. They are not in business to keep you in business. But they are not in business to put you out of business either.

Fear of change is what drives most to blame someone for their troubles, or percieved troubles.

1) No I'm not. Your packing backing bias doesn't allow you to view the market in an unbiased fashion. Just because a packer leaves the market for a day does NOT mean that supply magically vanishes.

In the short run, supply is relatively static. It takes years to adjust inventories, while demand is relatively variable, at least in comparison to supply. When one packer who consumes a major portion of that supply suddenly exits the market, what happens? In the very short term (a day or a week), as you've noted, that additional supply can be held back, however in that day or week, additional animals have been finished off and are now being held. Eventually the excess supply must be bled off to allow prices to rise.

2) Packers will do whatever it takes to ensure their survival. Wake up man. The Canadian beef market is expendable to international packers. The large packers are really only interested in commodity beef which they can purchase from other countries for considerably less money. All we will have left in Canada is our high end stuff, and commodity beef for servicing our own marketplace.

3) Fear of change? I find it laughable that anyone would remotely accuse me of being scared of change. I'm involved in the IT industry, an industry that is based on change and I embrace change for the better. What I see happening to our beef market is not change for the better, so why would I not try to fight it? Laying over and playing dead is how we ended up with the current levels of concentration within Canada, and doing so under the auspices of "accepting change" is simply another term for being too damned lazy to do anything about it.

Rod

 

[Jason]

Rod you just change the rules again.

You specifically stated that packers could move their entire capacity.


Now your trying to make a case that a packer will step out of the market, without their needs met for that period just to burden the supply side?

You give your head a shake.

Why would a business step away from what they do to earn income? The only reason as has been explained many times is if they are losing money and it is cheaper to slow the chain than lose the money.

The chains rarely slow down. If beef is moving out the back door it is often cheaper for a packer to sustain short term loss on the cattle they buy (or feed) rather than slow the chain.

How am I pro packer biased because I understand the basics of how they operate and can understand them not wanting to lose money? I thought that was a very simple concept.

Who said you need to lay over and play dead? I just disagree that we need more laws interfereing in our industry. I don't want the government stepping in and telling me I can't expand if I want to, or I can't produce more pounds of beef than I do now.

Laws that impede normal business will impede the ability primary producers have to forge their own future. If all producers started holding back a portion of their production and marketed it direct, who would suffer most? If that portion of production was increased to 100% over time, who would be left in the beef industry? Don't try to limit my right to change as I see fit because you want to limit some packer you don't agree with.

 

[DiamondSCattleCo]

You specifically stated that packers could move their entire capacity.

Now your trying to make a case that a packer will step out of the market, without their needs met for that period just to burden the supply side?

Why would a business step away from what they do to earn income? The only reason as has been explained many times is if they are losing money and it is cheaper to slow the chain than lose the money.

The chains rarely slow down. If beef is moving out the back door it is often cheaper for a packer to sustain short term loss on the cattle they buy (or feed) rather than slow the chain.

How am I pro packer biased because I understand the basics of how they operate and can understand them not wanting to lose money? I thought that was a very simple concept.

I said packers had demand for their entire capacity. I did NOT say that a word about live animal exports and I SPECIFICALLY stated that exports could not increase more than 10% past current levels. When asked to defend that assumption, I stated that current trucking capacity couldn't handle more than a 10% increase.

You're trying to confuse the issue.

You used to be a trucker, or at least I took some of your other posts as though you were. Do you remember the grief it was to obtain trucking permits and licensing for cross border operations? Many truckers don't bother these days, since they can get all the interprovincial hauls they need without incurring additional expenses on cross-border stuff. Hence the trucking shortage causing export grief. And other truckers are leary of the cross-border animal trade since BSE. Live animal exports can't increase all that much due to the shortage of veterinary staff.

I'm assuming that the packer is backing away because they are full from their own owned cattle, not just to increase the supply side. You even said yourself in the other thread that packers will back out of the market occasionally due to full chains. No conspiracy theory here. There are days when a packer just isn't buying. In a two packer marketplace, this is bad news for anyone who wants to sell that day.

I know you think that packer owned cattle are all reported to Canfax and are part of the known supply side, but I know different. I know one of the Mennonites who are currently feeding 2500 head, and my father delivers fuel to another producer who is currently feeding 1500 head. These guys aren't registered feedlots, and in the case of the Mennonite who has no phone, I'm not sure how Canfax would even contact him.

You are pro-packer biased because you won't even consider requiring the packers to report how many head they own and have on feed. This won't cause them to lose money, and would force them to deliver the same information as is required by feedlots in Canada. I don't think levelling the playing field is asking for much, and if they refuse, THEN I say we yank their ability to own stock, period.

So how about it Jason. What happens to the prices when a large packer pulls his bids, in what is essentially a two packer marketplace, and it results in an oversupply situation? What if the system is already oversupplied, then what happens?

Rod

 

[Jason]

Rod you and I differ on the 2 packer system. I know the big 2 in Alberta have to compete against US bids everyday. Proof I offer is feedlots telling me buyers from Cargill and IBP are travelling the country looking for fats.

If they were the only choice the industry would be in major trouble, as anytime there is an oversupply to the extreme it is a buyers market.

Regina or Moose Jaw last last week had a bunch of bred cows. Packers were the only bidders at 22 cents. They filled up and 100-150 cows were left. Someone got them for $150 each. That is what happens if there isn't enough demand for a product. It will still move but at greatly reduced price.

I didn't see an answer to my question about what if primary producers started holding back calves and direct marketing them. When the numbers got big enough who would be hurt from the chance in the industry?

 

[RobertMac]

I didn't see an answer to my question about what if primary producers started holding back calves and direct marketing them. When the numbers got big enough who would be hurt from the chance in the industry?

Exactly what needs to happen if producers are going to take back any control over their industry or their destiny. I think at least 40% of beef sales need to have primary producer involvement...from direct marketing to producer owned branded beef marketing companies to stockholder ventures like USPB.