State of the Beef Supply Chain: Shocks, Recovery, and Rebuilding, House Hearing, July 28, 2021
Summary
Serial No. 117-14 records the July 28, 2021 hearing of the Subcommittee on Livestock and Foreign Agriculture of the House Committee on Agriculture on shocks, recovery and rebuilding in the beef supply chain, with Chairman Jim Costa presiding. Costa named three shocks: the fire at a large beef processing plant in Holcomb, Kansas, whose 4 month closure cut processing capacity; the COVID-19 pandemic; and the cyberattack on JBS over Memorial Day weekend. Costa credited the American Rescue Plan with relief for farmers and ranchers. Witnesses were Jennifer van de Ligt and Lusk, Jacobs and Aherin, each listed with a Ph.D. A written answer from van de Ligt addresses ransomware attacks on JBS and grain cooperatives.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“State of the Beef Supply Chain: Shocks, Recovery, and Rebuilding, House Hearing, July 28, 2021.”
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[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
STATE OF THE BEEF SUPPLY CHAIN: SHOCKS,
RECOVERY, AND REBUILDING
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON LIVESTOCK AND FOREIGN
AGRICULTURE
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 28, 2021
__________
Serial No. 117-14
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
47-124 PDF WASHINGTON : 2022
-----------------------------------------------------------------------------------
COMMITTEE ON AGRICULTURE
DAVID SCOTT, Georgia, Chairman
JIM COSTA, California GLENN THOMPSON, Pennsylvania,
JAMES P. McGOVERN, Massachusetts Ranking Minority Member
FILEMON VELA, Texas AUSTIN SCOTT, Georgia
ALMA S. ADAMS, North Carolina, Vice ERIC A. ``RICK'' CRAWFORD,
Chair Arkansas
ABIGAIL DAVIS SPANBERGER, Virginia SCOTT DesJARLAIS, Tennessee
JAHANA HAYES, Connecticut VICKY HARTZLER, Missouri
ANTONIO DELGADO, New York DOUG LaMALFA, California
BOBBY L. RUSH, Illinois RODNEY DAVIS, Illinois
CHELLIE PINGREE, Maine RICK W. ALLEN, Georgia
GREGORIO KILILI CAMACHO SABLAN, DAVID ROUZER, North Carolina
Northern Mariana Islands TRENT KELLY, Mississippi
ANN M. KUSTER, New Hampshire DON BACON, Nebraska
CHERI BUSTOS, Illinois DUSTY JOHNSON, South Dakota
SEAN PATRICK MALONEY, New York JAMES R. BAIRD, Indiana
STACEY E. PLASKETT, Virgin Islands JIM HAGEDORN, Minnesota
TOM O'HALLERAN, Arizona CHRIS JACOBS, New York
SALUD O. CARBAJAL, California TROY BALDERSON, Ohio
RO KHANNA, California MICHAEL CLOUD, Texas
AL LAWSON, Jr., Florida TRACEY MANN, Kansas
J. LUIS CORREA, California RANDY FEENSTRA, Iowa
ANGIE CRAIG, Minnesota MARY E. MILLER, Illinois
JOSH HARDER, California BARRY MOORE, Alabama
CYNTHIA AXNE, Iowa KAT CAMMACK, Florida
KIM SCHRIER, Washington MICHELLE FISCHBACH, Minnesota
JIMMY PANETTA, California JULIA LETLOW, Louisiana
ANN KIRKPATRICK, Arizona
SANFORD D. BISHOP, Jr., Georgia
______
Anne Simmons, Staff Director
Parish Braden, Minority Staff Director
______
Subcommittee on Livestock and Foreign Agriculture
JIM COSTA, California, Chairman
ABIGAIL DAVIS SPANBERGER, Virginia DUSTY JOHNSON, South Dakota,
JAHANA HAYES, Connecticut Ranking Minority Member
J. LUIS CORREA, California SCOTT DesJARLAIS, Tennessee
JOSH HARDER, California VICKY HARTZLER, Missouri
RO KHANNA, California DAVID ROUZER, North Carolina
CYNTHIA AXNE, Iowa TRENT KELLY, Mississippi
BOBBY L. RUSH, Illinois DON BACON, Nebraska
STACEY E. PLASKETT, Virgin Islands JAMES R. BAIRD, Indiana
ANGIE CRAIG, Minnesota JIM HAGEDORN, Minnesota
SANFORD D. BISHOP, Jr., Georgia TRACEY MANN, Kansas
------ RANDY FEENSTRA, Iowa
BARRY MOORE, Alabama
Lesly Weber McNitt, Senior Professional Staff
(ii)
C O N T E N T S
----------
Page
Bacon, Hon. Don, a Representative in Congress from Nebraska;
submitted letter on behalf of William H. Rhea III, President,
Nebraska Cattlemen............................................. 93
Costa, Hon. Jim, a Representative in Congress from California,
opening statement.............................................. 1
Prepared statement........................................... 4
Submitted letter............................................. 61
Submitted letter on behalf of Bill Bullard, Chief Executive
Officer, Ranchers Cattlemen Action Legal Fund United
Stockgrowers of America (R-CALF USA)....................... 62
Submitted statements on behalf of:
Potts, Julie Anna, President and Chief Executive Officer,
North American Meat Institute.......................... 65
National Cattlemen's Beef Association.................... 76
Johnson, Hon. Dusty, a Representative in Congress from South
Dakota, opening statement...................................... 5
Mann, Hon. Tracey, a Representative in Congress from Kansas,
prepared statement............................................. 6
Witnesses
Lusk, Ph.D., Jayson L., Distinguished Professor and Head,
Department of Agricultural Economics, Purdue University, West
Lafayette, IN.................................................. 8
Prepared statement........................................... 9
van de Ligt, Ph.D., Jennifer, Associate Professor Veterinary
Population Medicine, College of Veterinary Medicine; Director,
Integrated Food Systems Leadership Program; Director, Graduate
Studies Applied Sciences Leadership; Director, Food Protection
and Defense Institute, University of Minnesota, St. Paul, MN... 12
Prepared statement........................................... 14
Submitted question........................................... 95
Jacobs, Ph.D., Keri L., Associate Professor of Ag and Applied
Economics; MFA Chair in Agribusiness; Distinguished Fellow,
Division of Applied Social Sciences, College of Agriculture,
Food and Natural Resources, University of Missouri, Columbia,
MO............................................................. 18
Prepared statement........................................... 19
Aherin, Ph.D., Dustin, Vice President, RaboResearch Animal
Protein Analyst, Rabo AgriFinance, Chesterfield, MO............ 23
Prepared statement........................................... 25
STATE OF THE BEEF SUPPLY CHAIN: SHOCKS, RECOVERY, AND REBUILDING
----------
WEDNESDAY, JULY 28, 2021
House of Representatives,
Subcommittee on Livestock and Foreign Agriculture,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:01 a.m., in
Room 1300, Longworth House Office Building, Hon. Jim Costa
[Chairman of the Subcommittee] presiding.
Members present: Representatives Costa, Spanberger, Hayes,
Harder, Khanna, Axne, Rush, Craig, Johnson, DesJarlais,
Hartzler, Rouzer, Kelly, Bacon, Baird, Hagedorn, Mann,
Feenstra, Moore, and LaMalfa.
Staff present: Prescott Martin III, Lesly Weber McNitt,
Caleb Crosswhite, Patricia Straughn, Erin Wilson, and Dana
Sandman.
OPENING STATEMENT OF HON. JIM COSTA, A REPRESENTATIVE IN
CONGRESS FROM CALIFORNIA
The Chairman. Good morning, everybody. The Subcommittee on
Livestock and Foreign Agriculture will now come to order. The
hearing this morning of the Subcommittee is on the State of
Beef Supply Chain: Shocks, Recovery, and Rebuilding. We have
four very good witnesses that will shed some light on the
challenges we are facing across the country as a result of a
multitude of factors.
First, let me commend Members of the Subcommittee here
today and give you a shout-out for those who are here in person
and those who are not, to deal with the safety issue and set
good examples by wearing our masks. It is something that none
of us really care to do; but, because of good public health
safety, it is something that we should do. And for the safety
of our staff and fellow Members, I want to thank those of you.
It is required in this hearing room per the guidance of the
attending physician that was issued yesterday, and it is just a
frustrating thing for all of us that this new variant has
raised a new level of outbreak among those primarily who are
unvaccinated. And so, it is a hope and a prayer that I urge all
of our American citizens to please, please get vaccinated. It
is the right thing to do for yourselves and for your family,
and for our nation. It is just, as kids we get vaccinated
because we want to, that is not the subject of this hearing,
but I remind people in my district all the time, and it is a
good thing to remind all of us.
So, this is a hybrid hearing. Proceedings allow, obviously,
for folks to participate as they are from their offices, and
thank you all for being engaged this morning.
For Members of the Committee, as you probably heard, we are
going to have votes at 11 o'clock, so Dusty and I, the Ranking
Member, we are going to try to figure out how to finesse it
when the votes are called. I am told there are three votes, so
that is about an hour. So, I want to still try to get our work
done. But I would like to make sure, at least, we have our
witnesses all give their testimony before the votes are called,
and then we will figure out what works best. Whether we try to
keep the hearing going and people alternate going to vote and
then come back, or whether we just adjourn. But I want to get
through this so that--everybody has busy schedules. Some of us
have multiple hearings that are going on right now. I have a
Foreign Relations Committee markup at 10 o'clock that I am
going to try to vote on.
And so, we are all busy and I am very sensitive to your
efforts to try to meet all your demands today, as I am trying
to meet mine.
With that housekeeping effort done, let me begin the
hearing in earnest. Obviously, as a result of the last 15, 16
months, we have learned--I hope we have learned some lessons.
One of them that I think I share with all the Members of this
Subcommittee is that because of the pandemic, as a result of
closing schools and closing restaurants, we last spring learned
that this complex, complicated food supply chain that we have
in our country was virtually turned upside down, and
bottlenecks ended up taking place in ways that we could never
have imagined. Therefore, it is incumbent upon us in the
Subcommittee to really examine what took place in this last
year, because I think we all believe that food is a national
security issue. We don't tend to look at it that way, but I try
to remind folks that less than five percent of America's
population every day works so hard at all the levels of food
production to put food on America's dinner table. And we do it
so well, in some ways that people take it for granted. A lot of
people think their food comes from the grocery store or their
favorite restaurant. And we know, of course--I mean, they may
get it at--well, most of them get it at the grocery store or
their favorite restaurant, but it doesn't come from there. And
so, therefore, I think we have learned that we are vulnerable.
We are vulnerable in a number of different ways, and the
purpose of today's hearing is really to look at that, to look
at the impacts.
Let me give you, as we like to say, all politics are local.
But my own situation in California, in 2019 the cattle and
calves industry in my state were valued at over $3 billion,
placing them in the top four valued commodities in California.
So, obviously like all of you, I have an interest in making
sure that our ranchers, producers, our cattlemen and -women
have resiliency as it relates to the ability to deal with
supply chains, fair markets in which they are able to put that
food on America's dinner table.
Over the past several years, the livestock industry has
been subject to three notable shocks, each which has
illuminated various vulnerabilities in the supply chain, and
has created instability in the marketplace. And that is really
going to be our discussion today.
The fire at one of the country's largest beef processing
plants in Holcomb, Kansas, in 2019 was the first event. That 4
month closure of this large plant created significant reduction
in processing capacity, which led to a drop off in fed cattle
prices. The market has just been very volatile in the last
couple years.
The next event, I mentioned already, was the COVID-19
pandemic. As we are all aware, the pandemic had an enormous
impact in every segment of America's economy and the beef
supply chain was not spared. Anyone who tried to buy ground
beef or a steak at the grocery store during the first few
months of the pandemic experienced the bottleneck in the supply
chain firsthand. At the farmgate, producers were dealing with
oversupply and, as I noted a moment ago, incredible volatility
in prices. That is not good.
President Biden and his Administration, I just think,
deserve great credit for their hard work over the last 6 months
to help Americans get back on their feet. I also want to give
credit to all of the Members here last year who helped us pass
multiple COVID relief packages. The most recent one, of course,
is the American Rescue Plan (Pub. L. 117-2), which has provided
relief to our farmers and ranchers as they continue to rebuild,
and Secretary Vilsack and his team are, I know, working
overtime to implement this relief.
The third shock that I think we have to look in depth--and
we are not going to solve that problem this morning, but we
have some witnesses who can certainly add some value as to what
we might think about doing--is cyberattack, cyberattack on JBS
over Memorial Day weekend. Cyberattacks like this will only
increase. Their potential effect on our food and agriculture
system cannot be ignored, just as they cannot be ignored as
their potential impacts on our electrical grid, on our
financial systems, and every other aspect of American life,
because in the 21st century, we are all connected. And that
provides a lot of benefits and efficiencies, but it provides a
lot of vulnerabilities, and our food supply chain, we have
learned the hard way about potential vulnerability to
cyberattacks. So, we cannot allow food security, which is
national security, and the protecting our food system from
foreign interferences to be disrupted, and it something that I
want to work with all of you in terms of thoughts on how we
protect our vulnerabilities from cyberattacks.
So, it is our job on the Subcommittee to get to the bottom
of many of the complex challenges confronting agriculture and
help our farmers, ranchers, dairymen and -women overcome these
challenges. Today we will hear from four very good witnesses--I
hope you have had a chance to read their testimony--who will
tell us where they think the vulnerabilities in our food supply
chain lie and their innovative ideas for helping the beef
supply chain adapt, adapt, and to become more resilient, so
that we can use what we have learned over these three factors
that have impacted us over the last 2 years, and create some
positive change.
Now, my Subcommittee staff, who makes me look good in spite
of myself, will probably be upset that I didn't fail to read
the earlier part of the briefing, but I will read it now.
Obviously, after brief opening remarks, Members will
receive testimony from out witnesses, and then we will follow
the normal process where the Ranking Member will make his
thoughts heard, and then Members will be recognized in the
order of seniority, alternating between Majority and Minority,
and when you are recognized, you all know the rules. You have 5
minutes and we try to be sensitive to everybody's time. If you
are in the middle of a question being responded to, I will not
interrupt the response to the answer to your question. But
also, I am not a wild fan of people spending 4\1/2\ minutes
making a statement and then asking the question. I have been
chairing hearings for a long time, so just a little thing I
have.
Anyway, if you are not speaking, remain muted because we
have this virtual hearing that we are dealing with, and it is
difficult. It is challenging, and for those Members who are--
because of other conflicting obligations--working out of your
office, may I remind you what I try to remind myself--my staff
reminds me, and that is when you are not speaking, please press
the mute button. I know sometimes you are multitasking, but I
don't think the rest of us need to hear some of the other
efforts that you are multitasking on. So, please mute your
microphone if you are not dealing with your 5 minutes.
Anyway, the timer, I am told, because of our good, good
staff will remain visible, right? Okay. So, in consultation
with the Ranking Member, pursuant to Rule XI(e), I want to make
Members of the Committee aware that Members of the full
Committee may join us today. Those are the magic words. She was
wondering whether I was going to say them or not. I have said
that.
[The prepared statement of Mr. Costa follows:]
Prepared Statement of Hon. Jim Costa, a Representative in Congress from
California
Good morning. To start, I'd like to thank our witnesses, my Ranking
Member Mr. Johnson, and the other Members of the Subcommittee for
participating in today's hearing to discuss a topic that continues to
garner a great degree of attention, and rightfully so. The shocks that
our cattle industry have undergone in the last 2 years have impacted
millions of people along the entire supply chain--from the cattle
producer to the feeders, processors, retailers, and consumers.
Livestock are a critical part of our food system and a crucial
component of the economy in my home State of California. In 2019 cattle
and calves in my state were valued at over $3 billion, placing them in
the top four valued commodities in the state. So, I have a substantial
interest in making sure that our producers have resilient supply chains
and fair markets in which to trade. Over the past several years the
livestock industry has been subject to three notable shocks, each of
which has illuminated various vulnerabilities in the supply chain and
created instability in the marketplace.
The fire at one of the country's largest beef processing plant in
Holcomb, Kansas in 2019 was the first event. The 4 month closure of a
large plant created a significant reduction in processing capacity,
which led to a drop off in fed cattle prices.
The next event was the COVID-19 pandemic. As we are all aware, the
pandemic had an enormous impact on the entire economy and the beef
supply chain was not spared. Anyone who tried to buy ground beef or a
steak at the grocery store during the first few months of the pandemic
experienced the bottleneck in the supply chain firsthand. At the
farmgate, producers were dealing with oversupply and incredible
volatility in their prices.
President Biden and his Administration deserve great credit for
their hard work over the past 6 months to help Americans get back on
their feet. I'd also like to give credit to my colleagues in Congress
who helped pass multiple COVID relief packages, most recently the
American Rescue Plan, which has provided relief to our farmers and
ranchers as they continue to rebuild. Secretary Vilsack and his team
are working overtime to implement this relief.
The third shock is the cyberattack on JBS over Memorial Day
weekend. Cyberattacks like this will only increase, and their potential
effect on our food and agriculture system cannot be ignored. I think
everyone on this Committee understands that food security is national
security and protecting our food system from foreign interference and
disruption is something that must be taken seriously.
It is our job on this Subcommittee to get to the bottom of the most
complex challenges confronting agriculture and to help our farmers and
ranchers overcome these challenges. Today we will hear from four expert
witnesses, who will tell us where the vulnerabilities in our supply
chain lie and share their innovative ideas for helping the beef supply
chain adapt to become more resilient, so that we can use what we learn
today to create positive change. Before the introduction of our
witnesses, I'd like to recognize the Ranking Member, Mr. Johnson of
South Dakota, for any remarks he'd like to make.
The Chairman. I think we are all there, and I will defer to
my friend, the Ranking Member, for his opening statement,
because I do not see the chair or the Ranking Member of the
full Committee here. So, we are going to go on. Dusty?
OPENING STATEMENT OF HON. DUSTY JOHNSON, A REPRESENTATIVE IN
CONGRESS FROM SOUTH DAKOTA
Mr. Johnson. Thank you very much, Mr. Chairman, and I will
start with two notes of gratitude. The first is to you. When
Congress focuses in a bipartisan way on issues, good things
happen and these witnesses, this is going to be a good thing.
Thank you.
And I also just want to note my gratitude to other Members
of this Subcommittee. I mean, when I think about the number of
conversations, earnest conversations, honest conversations I
have had on these topics with Jim Costa or Randy Feenstra or
Tracey Mann or Jim Baird or Don Bacon or Vicky Hartzler or
anybody who is on Zoom, it is amazing. I mean, I think the
American people should feel good that their Members of Congress
really do care about these issues in an emotional way, but also
in a data-driven way. Because for those of us who represent
ranchers or backgrounders or stockers or feeders, we know how
emotional and how unpredictable the last couple of years have
been. And Mr. Chairman, you noted it right. Black swan event
after black swan event, and it has made it really hard for the
people who try to feed America. And I think even the urban
folks have seen how critically important, but also how fragile
these supply chains are.
You are right, Mr. Chairman. Food is a national security
issue, and it is something that all Americans probably should
pay more attention to than they do.
I thought in the wake of COVID or during the middle of
COVID we did some really good bipartisan work. One hundred
forty Members of Congress stepped up in a bipartisan way to
work with the Administration to make sure that CFAP was rolled
out to the people in the cattle industry who absolutely needed
that assistance. And I think as we move past, hopefully, COVID,
we will understand that that was extremely important relief,
but it was temporary relief for an extraordinary time. And the
market deficiencies that were laid bare during that time aren't
just going away, so we need to focus on moving from triage to
long-term recovery. The cattle markets and processing are
incredibly complex industries, and they are all trying to
respond to market signals. Some of our presenters today will
talk about how they are always seeking but never finding
equilibrium, that balance to make sure that the number of head
of cattle match the processing capacity, match consumer demand,
and vice versa. Every step along that way is fraught with
complexity, and I think one thing that we are all are going to
hear loud and clear in the testimony today is that we don't
have enough processing capacity. And that is a market failure
that has negative impacts both on consumers who want to eat the
beef, as well as producers who are trying to raise it. And we
need to figure out how to increase that capacity. The lack of
capacity has hindered the American ranchers' ability to reap
some of the benefits of an increasing demand, an increasing
appetite for beef across the world.
As I move toward my close, though, I don't want to be so
negative because I think we understand that with challenging
times come opportunities. And since the pandemic, we have seen
a tremendous amount of action to increase and to diversify our
processing capacity. I am glad to see that the bill that I had
with Congresswoman Angie Craig that leveled the playing field
for small processors when they run overtime and need Federal
inspectors, I was glad to see that that passed and I am glad to
see that that is being rolled out. I am also pleased with the
announcements that $500 million is going to be available to
increase resiliency in the processing sector. My goodness, how
much we need that resiliency. My hope and that of a number of
people on this Subcommittee is that we can allocate those funds
in a way that promotes producer and cooperative ownership that
leverages funding to focus on enhancing processing capacity,
and on lowering cost to entry for that diversified processing
ownership.
I also want to call out the role of private-sector, because
obviously, that is the biggest piece of this puzzle, and we
have a number of new, independent processors that have
announced plans to build facilities. And to the extent that
this Committee can remain focused on reducing those barriers to
entry, so many regulatory hurdles, so many capital hurdles, so
many workforce hurdles, to the extent that we can stay focused
on reducing those barriers to entry, we are going to have a
healthier marketplace.
I will close, Mr. Chairman, by noting what we all know,
that American ranchers have worked for generations to improve
quality and efficiency so they can feed their fellow Americans
and people all across this globe, and if we do it right, we are
going to be in a position to help them continue that glorious
and that sacred mission for generations more to come. And if
that isn't work worth doing, I don't know what is.
And with that, I would yield back.
The Chairman. I thank the gentleman for his comments, and
as I have indicated, any Members who wish to have a statement,
we can submit that for the record.
[The prepared statement of Mr. Mann follows:]
Prepared Statement of Hon. Tracey Mann, a Representative in Congress
from Kansas
On behalf of the farmers and ranchers in the 1st District of
Kansas, I am glad to participate in today's Subcommittee hearing to
address the beef supply chain. This issue is especially near and dear
to me, since both sides of my family have farmed and fed cattle in
western Kansas for more than 120 years.
The Big First ranks number one among Congressional Districts for
the value of sales of cattle and calves, at more than $9 billion
annually in the latest Census of Agriculture. There are more than 4.4
million cattle and calves raised in my district and significant packing
capacity with more than 20 percent of the nation's beef slaughter
capacity.
We see the entire beef supply chain in the Big First, from cow-calf
producers to cattle feeders to the packers. More broadly, the beef
sector supports the grain producers, equipment manufacturers,
veterinarians, livestock markets, and many other businesses that
populate rural towns across Kansas.
In a competitive cattle market, it is vital for producers to be
able to differentiate their product to eventually suit the tastes of
consumers. As seen by the growing demand for beef, selective breeding
and nutrition that have increased quality bring opportunities for
producers to negotiate a premium price for their cattle. These
contracts allow feeders to benefit from making a value-added investment
and provide some certainty in a volatile market.
As we have seen over the last several years, market disrupting
events can have lasting impacts on the beef supply chain. While the
Tyson plant in Holcomb was back up and running more quickly that we
expected, COVID-19 followed soon after and made price recovery more
difficult. We are still seeing a large supply of slaughter-ready cattle
in the supply chain. Combined with labor shortages, this backup keeps
cattle prices down, even when there is strong demand from consumers
domestically and abroad.
There have been questions regarding packer behavior in the
marketplace, and I have asked USDA and DOJ to provide details on any
findings of misconduct. This uncertainty has also led to several
legislative proposals and government solutions for a market that has
historically seen high and low prices in both the beef and cattle
sectors. Before we consider more government involvement, I would
encourage my colleagues to consider the possibility that this could
limit producers' ability to choose how to market their own cattle.
We need to reduce the oversupply of cattle by ensuring our packing
plants are back to full operating capacity. The additional unemployment
benefits are hurting the labor shortage, and I have encouraged our
Governor to put an end to the supplemental unemployment payments. We
should also work to increase shackle space, and also increase price
discovery.
As they have for decades, I am confident that our farmers and
ranchers will rise to the challenge and continue to provide a safe and
affordable food supply. I look forward to hearing from each of the
witnesses today and working with my colleagues on these vital issues.
Thank you.
The Chairman. Let's get on to our witnesses here so we can
begin their testimony. It is a busy day today and tomorrow, and
so we have a lot of things going on.
But I am please to welcome a very distinguished panel that
our staff were able to put together here for this important
hearing. They have a wide, wide range of experience and
expertise.
So, our first witness today--and I don't know what box they
are in, in this virtual here--is Dr. Jayson Lusk. I think we
all lament. Hopefully we can knock down this pandemic, but I
like to have the witnesses here. I like to talk to them before
the hearing starts and get a chance to interact. But Dr. Lusk
is a Distinguished Professor and Head of the Agricultural
Economics Department of Purdue University. Lusk is a food and
agriculture economist who studies what we eat and why we eat
it. That is really a subject of a much longer conversation, I
think. He has a bachelor's of science and food technology from
Texas Tech, a Ph.D. in agriculture economics from Kansas State
University. My gosh. Purdue, Texas Tech, Kansas State, and has
appointments to Mississippi State and Oklahoma State
Universities. Obviously, he made it a point of visiting many of
the wonderful universities in this country. So, let us begin
with Dr. Lusk.
Dr. Lusk, are you there?
Dr. Lusk. Yes, I am here.
The Chairman. Can you hear us?
Dr. Lusk. I can.
The Chairman. Okay, please begin.
STATEMENT OF JAYSON L. LUSK, Ph.D., DISTINGUISHED
PROFESSOR AND HEAD, DEPARTMENT OF AGRICULTURAL ECONOMICS,
PURDUE UNIVERSITY, WEST LAFAYETTE, IN
Dr. Lusk. Chairman Costa, Ranking Member Johnson, and
Members of the Subcommittee, thank you for inviting me here
today. As indicated, my name is Jayson Lusk. I currently serve
as a Distinguished Professor and Head of the Agricultural
Economics Department at Purdue University.
Beef and cattle markets have been extraordinarily volatile
over the past couple years, and when you are trying to
understand the current challenges, I think some historical
perspective is warranted.
Over the past decade, cattle inventories have followed a V-
shaped pattern. From 2010 to 2015, cattle slaughter fell by
more than 16 percent as producers cut inventory in response to
high feed prices and drought. The change in cattle numbers
affected the packing sector. There was, at that time, too much
packing capacity relative to the number of cattle and some
packers exited because it was no longer profitable. Following a
common cyclical pattern, producers retained heifers and
expanded their herds to capture the benefits of the higher
prices that were experienced in 2014 and 2015, but by 2019,
total cattle slaughter had increased almost 17 percent relative
to the 2015 low. The packing sector, having adjusted to a
smaller herd size, now found itself in the opposite position.
There was a high number of cattle relative to capacity, which
put downward pressure on cattle prices. And it was against this
backdrop that we experienced the unexpected fire, pandemic, and
cyberattacks.
There is a key lesson to take from this recent historical
episode. There are long lags and ripple effects in cattle
markets. My recommendation to you is don't overly focus on what
is happening today, but make policies for the future.
With that background, I am going to briefly touch on three
issues facing the industry. The first is capacity. As noted,
processing capacity in 2020, even if the pandemic hadn't
occurred, was likely going to be tight. But today, we appear to
be in a different phase of the cattle cycle. Cattle inventory
is falling, feed prices have been rising, there is a drought in
the West. These factors will likely bring cattle numbers closer
in line with current capacity. Moreover, there are number of
private initiatives to increase automation and add more
capacity. More capacity, fewer cattle will help support future
cattle prices. Making additional government investments in
capacity for the purpose, at least, of improving cattle prices
may be fixing yesterday's problem.
Support for small and local processors may benefit local
economic ecosystems and may increase custom harvest operation
for producers, but these operations, because they lack
economies-of-scale, must focus on quality or service to be
competitive.
The costs of adding packing capacity are not limited to
concrete and iron. I encourage you to consider other barriers
that limit new entrants. These factors include labor
availability and costs of complying with regulations related to
labor, food safety, zoning, transportation, and more.
The second issue relates to proposals to require a share of
cattle to be sold on a negotiated or cash basis, as opposed to
a formula or grid, in an effort to improve price transparency.
An important distinction needs to be made between price levels
and price volatility. And even if all cattle were traded on a
negotiated basis, the price level would not necessarily
improve.
Are there less costly ways to improve price discovery than
a mandate? Livestock Mandatory Reporting, LMR, is one tool that
has improved price transparency. Continued research into this
legislation might further benefit the industry. Market maker
programs that incentivize voluntary participation and cash
markets is another tool. Even if a mandate were pursued, it
might be made more efficient if coupled with a cap-and-trade
system where obligations to secure cattle in a cash market
might be bought and sold in a secondary offset market similar
to what currently exists for fuel manufacturers mandated to
blend biofuels. Including negotiated grids in a mandate would
also lessen the cost of such a policy.
Finally, I encourage you to focus on policies that improve
the health of the entire industry. Discussions of cattle prices
and packing capacity can give the incorrect impression that
beef and cattle markets are a zero-sum game. But consider
policies that increase the size of the pie for all players.
Examples include improving trade relations that allow products
to flow to consumers who value them most, and investments in
research and innovation that improve demand or improve
productivity.
In conclusion, my view is that the beef cattle system
responded remarkably well to a series of large and unexpected
disruptions. Cattle prices have been on the rise. Consumer
demand is strong, and these core facts should remain front of
mind when considering policy changes because the cattle
industry is constantly evolving, and there is a need to remain
competitive with other plant- and animal-based proteins that
have a place on the consumer's dinner plates.
[The prepared statement of Dr. Lusk follows:]
Prepared Statement of Jayson L. Lusk, Ph.D., Distinguished Professor
and Head, Department of Agricultural Economics, Purdue University, West
Lafayette, IN
Chairman Costa, Ranking Member Johnson, and Members of the
Subcommittee, thank you for inviting me here today. I am a food and
agricultural economist and I serve as Distinguished Professor and Head
of the Agricultural Economics Department at Purdue University.
I will begin by providing some background on some of the economic
factors that have contributed to the volatility in cattle and beef
markets in recent years. Then, I will shift my focus to three economic
issues currently facing the beef cattle industry: packing capacity and
resiliency, price discovery, and the importance of trade and
innovation.
For the past couple years, beef and cattle markets have been
extraordinarily turbulent and volatile. Major events include the loss
of a major packing plant to fire in 2019, demand-induced disruptions
from COVID-19 resulting from the decline in restaurant spending and the
spike in grocery spending, supply-induced disruption from COVID-19
resulting from the worker illnesses in packing plants, increasing feed
prices, drought in the West, and recently, increased Chinese imports
and cyber-attacks. Only one other year in the past 30 has witnessed
more volatility in live fed cattle prices than 2020.\1\ Consumers
likewise experienced significant price shocks. Retail beef prices
increased 25% year-over-year price in June 2020 before falling 3% year-
over-year in May 2021.\2\
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\1\ Volatility, in this instance, is defined as the annual average
of the week-to-week absolute value of the percent change in 5-market
weighted average live steer price as reported by the USDA Agricultural
Marketing Service. There was similar but slightly higher volatility in
2016 compared to 2020.
\2\ Figures are my calculations based on data from the Bureau of
Labor Statistics.
---------------------------------------------------------------------------
When trying to understand the current challenges, some historical
perspective is warranted. Over the past decade, cattle inventories have
followed a V-shaped pattern. Corresponding cattle prices have followed
an inverse V-shaped pattern. From 2010 to 2015, total number of
commercial cattle slaughtered fell by more than 16%.\3\ The decline
resulted from producers cutting inventory as a result of a dramatic
increase in feed prices and a drought in some parts of the Midwest. The
change in cattle numbers affected the packing sector. There was, at the
time, too much packing capacity relative to the number of cattle, and
returns to cattle processing took a hit. Some small and medium packers
exited because it was no longer profitable, and some large packers
shuddered plants in an attempt to align capacity with inventory.
---------------------------------------------------------------------------
\3\ Figures are my calculations based on data from USDA, National
Agricultural Statistics Service.
---------------------------------------------------------------------------
The high levels of capacity relative to cattle numbers, coupled
with strong demand, led to a rise in cattle prices. Following a common
cyclical pattern (the ``cattle cycle''), producers retained heifers and
expanded their herds to capture the benefits of higher prices that were
experienced in 2014 and 2015. By 2019, total commercial cattle
slaughter had increased 16.7% relative to the 2015 low. The packing
sector, having adjusted to a smaller herd size, now found itself in the
opposite position: there was a high number of cattle relative to
processing capacity, which put downward pressure on cattle prices. It
was against this backdrop that we experienced the unexpected fire,
pandemic, and cyber-attack that further exacerbated the effects of
limited capacity. If these unexpected events had occurred in 2014 or
2015, the impacts on producers would have been much different.
There is a key lesson to take from this recent historical episode.
There are long lags and ripple effects in cattle and beef markets. A
producer makes a decision today to breed a cow, and it will be roughly
3 years till the resulting offspring is ready for market. Likewise,
investors today decide to build a new packing plant. It will be years
before construction is finished and the capacity is brought online.
Everyone is betting on the future with information that ultimately be 2
to 3 years old by the time outcomes are realized. Cattle inventories
have already started to fall, and cattle prices have risen since last
summer. My recommendation to you, as policy makers, is the following:
do not overly focus on what is happening today. Consider what will be
needed 3 to 5 years from now. Market participants adapt to changing
circumstances, although sometimes more slowly than we'd like because of
biological and construction lags, but policy ideally should focus on
longer-run forces that improve the well-being of producers and
consumers in an industry.
With that backdrop, I will move on to the first of three current
issues facing the industry. There are a number of state and Federal
initiatives to increase processing capacity. As previously, noted,
processing capacity in 2020, even if the pandemic hadn't occurred, was
likely to be ``tight,'' which contributed to downward pressure on
cattle prices. We appear, however, to be in a different phase of the
cattle cycle. Cattle inventory is falling. Feed prices are rising.
There is a drought in West. These factors will, over time, likely bring
cattle numbers closer in line with current capacity. Moreover, even
absent Federal investments, there are a number of private initiatives
to increase automation and add more packing capacity. More capacity,
and fewer cattle, will help support future cattle prices. But, as the
experience of the past decade has revealed, that will not be the end of
the story. Whether we are setting ourselves up, in 5 years' time, for
another situation in the packing sector like the one experienced in
2014 and 2015 remains to be seen. Additional government investments in
capacity, for the purpose of improving cattle prices, may be fixing
yesterday's problem.
There is another argument being made for adding capacity: improving
resiliency to the sector. Extra capacity could be seen as a form of
insurance against unexpected capacity reductions from events like fire,
pandemic, or cyber-attack. COVID-19 infections led to and dramatic
reduction the nation's beef slaughter capacity. There was little excess
capacity in the system and nowhere for market-ready cattle to go.\4\ My
research with Purdue colleague Meilin Ma indicates that even if we
would have had a more distributed packing sector consisting of more
small and medium sized plants instead of a small number of large
plants, the price spread dynamics and beef supply disruptions would not
have likely have been appreciably different than what we witnessed.\5\
The problem at the time was not the size or localness of the plants but
total industry capacity.
---------------------------------------------------------------------------
\4\ There is some short-term ability to bring extra capacity online
by packers running additional shifts on weekends or moving steer and
heifer slaughter to cow-kill plants.
\5\ Ma, M. and J.L. Lusk. ``Concentration and Resilience in the
U.S. Meat Supply Chains.'' Paper presented at National Bureau of
Economic Research (NBER) conference on Risks in Agricultural Supply
Chains, May 21, 2021.
---------------------------------------------------------------------------
However, excess capacity is expensive, and it is in no individual
packer's interest to routinely operate at significantly reduced
capacity. Imagine approaching an investor asking for tens of millions
of dollars with a plan to only operate a facility at only 50% capacity.
Few bankers would agree to such a deal. Support for subsidizing
additional processing capacity might be justified on public insurance
grounds, but ultimately, the ebbs and flows of the cattle cycle will
determine the long-run size of the packing industry, and newly
subsidized plants will be at an advantage over older existing plants
when cattle numbers come back in line with capacity and ultimate
profitability determines the size of the packing sector. Support for
small and local processors might benefit local economic ecosystems and
increase custom harvest operations for producers, but these operations,
because they lack economies-of-scale, must focus on quality and service
to be competitive, and are such a small part of the national industry
that investments at this size are unlikely to significantly alter the
aggregate industry capacity. It is also worth noting that costs of
adding packing capacity are not limited to concrete and iron. I
encourage you to consider other costs and barriers that limit new
entrants thus expanded capacity. Availability of labor has been a
significant challenge for the industry and labor constraints put a
limit on processing capacity. Other factors include the costs of
complying with Federal, state, and local regulations related to labor,
food safety, zoning, transportation, and more.
Second, in light of the relatively low cattle prices experienced in
2020, there have been a number of proposals to affect the marketing of
cattle. One set of concerns has focused on the share of cattle sold on
a negotiated or cash basis. While the share of cattle sold in this
manner, roughly 20%, has not changed much since the high-cattle-price
era experienced in 2014 and 2015, it is lower than was the case a
decade ago. Cattle sold on a formula basis often utilize the
negotiated, cash price as a base. Thus, trades on a relatively small
number of cattle influence the price for a much larger number of
formula-priced cattle. A concern has emerged as to whether there are
enough trades in the cash market to truly reflect market fundamentals.
In efforts to improve price discovery, an important distinction needs
to be made: price levels and price volatility. Even if all cattle were
traded on a negotiated, cash basis, the price level would not
necessarily improve; however, we might be more confident that any given
transaction would be reflective of the ``true'' underlying supply and
demand conditions at the time and location. Whether, in fact, there are
too few cash transactions to reflect market fundamentals is debatable.
Attempting to mandate more cattle be sold in a negotiated, cash
basis has potential benefits and certain costs. The fact that most
producers and packers choose to sell cattle using alternative marketing
arrangements suggests they see benefits in this form of marketing in
the form of increased certainty, lower transactions costs, and supply
chain coordination. Mandating a certain percent of cattle be sold on a
negotiated basis would entail some producers and packers foregoing a
marketing method they currently find more desirable. That is a cost.
Moreover, strengthening of consumer demand for beef over the past
couple decades has occurred over a period in which there was increased
use of formula pricing that rewarded quality improvements. Eroding the
ability of consumers, retailers, and packers to incentivize quality
through formulas and vertical coordination may have detrimental impacts
on demand.
The best economic case for mandating more negotiated transactions
rests on the argument that price discovery is a public good. Are there
less costly ways to improve price discovery than a mandate? Livestock
Mandatory Reporting (LMR) is one tool that has improved price
transparency and discovery. Continued research into improvements in
this legislation might further facilitate price discovery. Taxes to
avoid, or subsidies to use, negotiated cash markets are seldom
mentioned despite having similar economic intuition as a mandate. Even
if a mandate were pursued, it might be made more efficient if coupled
with a ``cap and trade'' system, where obligations to secure cattle in
a cash market might be bought and sold in a secondary ``offset'' market
similar to what currently exists for fuel manufactures mandated to
blend a given amount of biofuels. Including negotiated grid or formula
transactions in a mandate would also lessen the costs of the policy. It
is important to consider solutions that may be less costly and
restrictive than a mandate because the cattle industry is constantly
evolving and needs to remain cost-competitive with other animal- and
plant-proteins to have a place on consumers' dinner plates.
I will conclude with an encouragement to focus on policies that
improve the health of the entire industry. Discussions of cattle prices
and packing capacity can give the impression that beef and cattle
markets represent a zero-sum game. But, one party's gain does not have
to come at the expense of another. What policies increase the size of
the pie available to all participants: cow-calf producers,
backgrounders, feedlots, packers, retailers, and ultimately, consumers?
As witnessed in recent months, improved trade relations have the
ability improve economic circumstances for multiple segments of the
industry. The U.S. exports about 12% of beef production. Trade
agreements are important to help open markets for U.S. producers to
allow products to flow to consumers who value them most.
Investments in research and innovation that increase demand or
improve productivity are likely a net win for consumers, producers, and
the environment. Had we not innovated since 1970, about 11 million more
feedlot cattle would have been needed to produce the amount of beef
U.S. consumers actually enjoyed last year. Innovation and technology
saved the extra land, water, and feed that these cattle would have
required, as well as the waste and greenhouse gases that they would
have emitted. Investments in research to improve the productivity of
livestock and poultry can improve producer profitability, consumer
affordability, and the sustainability for food supply chain.
Despite the challenges of the past couple years, the beef cattle
system responded remarkably well to a series of large, unexpected
disruptions. Producer prices have been on the rise. Consumer demand is
strong. These core facts should remain front of mind when considering
changes that would significantly affect the cattle industry, going
forward.
The Chairman. Thank you very much for your insightful
testimony. I think you are suggesting that we look at the long-
term as we deal with the challenges that we are facing in terms
of the supply chain, and I know that there will be questions
based upon your very good testimony. So, stay tuned, because we
all have questions.
Our next witness today is Dr. Jennifer van de Ligt, the
Director of Integrated Food Systems Leadership Program, the
Director of Food Protection and Defense Institute, and an
Associate Professor of the University of Minnesota. A key focus
of Dr. van de Ligt's current research portfolio is building
collaborations to advance food and feed security, safety, and
defense, and supply chain resilience, which is all part of,
really, this morning's Subcommittee hearing.
Dr. van de Ligt completed her Ph.D. in nutrition from the
University of Kentucky, and what I am noticing here is a trend.
Our witnesses here today seem to have had very good education
from a number of American universities, so good for all of you.
Dr. van de Ligt, would you please begin your testimony?
STATEMENT OF JENNIFER van de LIGT, Ph.D., ASSOCIATE
PROFESSOR VETERINARY POPULATION MEDICINE,
COLLEGE OF VETERINARY MEDICINE; DIRECTOR,
INTEGRATED FOOD SYSTEMS LEADERSHIP PROGRAM;
DIRECTOR, GRADUATE STUDIES APPLIED SCIENCES
LEADERSHIP; DIRECTOR, FOOD PROTECTION AND DEFENSE INSTITUTE,
UNIVERSITY OF MINNESOTA, ST. PAUL, MN
Dr. van de Ligt. Thank you, Chairman Costa, Ranking Member
Johnson, and Members of the Subcommittee on Livestock and
Foreign Agriculture. Thank you for inviting me to participate
in today's hearing. It is an honor to appear before you.
I am the Director of the Food Protection and Defense
Institute, and Associate Professor in the College of Veterinary
Medicine at the University of Minnesota. And as Chairman Costa
indicated, I also have experience from the University of
Kentucky, as well as from the University of Illinois and North
Carolina State University. So, with the theme of representing
the country and its fine educational institutions.
Since 2004, the Food Protection and Defense Institute, an
Emeritus Homeland Security Center of Excellence, has partnered
with stakeholders across government, industry, and academia to
protect the food system from disruption. Cyber risk, the focus
of my testimony, is not new to the food and ag sector, but the
risk of significant business disruption and national security
threats from cyberattack are growing.
An evolving cyber risk in the food and ag sector is the
growing dependence upon cyber-based information and operational
technology systems. These operational technology systems manage
the most critical aspects of food production, typically have
the lowest level of integrated cybersecurity protections, and
are often omitted from enterprise cybersecurity plans,
protections, and training.
In response to the USDA request for public comment on
supply chains for the production of agricultural commodities
and food products, we recommended five specific actions for the
USDA to take to improve cybersecurity within the national food
and agriculture supply chains. These actions are outlined in my
written testimony and require that USDA serve as the lead
agency in collaboration with FDA, DHS, and FBI with
consultation of food and ag insurance and cybersecurity
industry partners.
So, why should these actions be taken? The food and ag
sector is incredibly diverse, from small businesses and family
farms to multi-national corporations that produce an infinite
variety of foods. All of these businesses are individually
vulnerable to cyberattack. On a broader scale, though, the food
system is one of the most interconnected systems within the
critical infrastructures. From a cyber perspective, this
amplifies the attack surface and the risk. It also amplifies
the potential magnitude of system disruption and failure from a
cyberattack, including its secondary and tertiary cascading
impacts.
For example, the recent JBS cyberattack disrupted meat
processing operations in several countries, and simultaneously
caused disruptions to supply chains, logistics, and
transportation to customers, and it increased consumer prices.
Additionally, the food and ag sector is labor intensive. A
history of labor shortages coupled with technology advancements
have driven automation in the sector. With increased automation
and computational and network complexity, cyber risk also
increases.
Regardless of why cyber risk exists, cyberattacks in the
food and ag sector have the potential to cause catastrophic
supply chain disruption, and can endanger our national
security.
As a hypothetical example of a national security threat,
consider for a moment the impact if both of the only two HDPE
pellet plants--those are the plants that produce the gallon
milk jug preforms--were victims of a simultaneous cyberattack.
This is not unrealistic. We do know that during Hurricane
Katrina, when just one of these HDPE facilities was
compromised, the supply of fluid milk at the consumer level
plummeted to shortage levels in many areas of the country,
while dairy farmers dumped millions of gallons of milk. A
situation such as this could be repeated and affect a broad
area of the nation in the event of a targeted cyberattack.
It should also be recognized that the food and ag sector
partners must balance a multitude of supply chain, food safety,
labor, financial, and other operational risks, in addition to
cyber risk. Not only does managing cyber risk increase
operational costs, but there are very few experts with the
knowledge and experience to effectively enhance cybersecurity
in the food and ag operational environment. This type of expert
is often recognized as irreplaceable, and sometimes are
referred to as unicorns within the food industry. We need to
train and field many more of them.
Securing the vast cyber infrastructure and electronic
information system sustaining America's food and ag supply
system is vital to the economic totality of the system, and to
our nutritional and national security. If we do not act, we
risk the nation's ability to provide a sufficiency of
nutrition, the very essence of well-being for our friends,
family, colleagues, constituents, and institutions.
We appreciate the opportunity to engage and contribute to
this national discussion. I look forward to further discussion.
[The prepared statement of Dr. van de Ligt follows:]
Prepared Statement of Jennifer van de Ligt, Ph.D., Associate Professor
Veterinary Population Medicine, College of Veterinary Medicine;
Director, Integrated Food Systems Leadership Program; Director,
Graduate Studies Applied Sciences Leadership; Director, Food Protection
and Defense Institute, University of Minnesota, St. Paul, MN
Chairman Jim Costa, Ranking Member David Rouzer, and Members of the
Subcommittee on Livestock and Foreign Agriculture, thank you for
inviting me to participate in today's hearing. It is an honor to appear
before you.
I am the Director of the Food Protection and Defense Institute and
Associate Professor in the College of Veterinary Medicine at the
University of Minnesota.
The Food Protection and Defense Institute (FPDI) at the University
of Minnesota is an Emeritus Homeland Security Center of Excellence
dedicated to providing leading-edge research, technical innovation, and
education to protect the food system from disruption. Since 2004, FPDI
has partnered with stakeholders across government, industry, NGOs, and
academia to assure product integrity, supply chain resilience, and
brand protection throughout the food and agriculture sector.
I have an extensive background in food defense, animal feed and
human food production, human and animal nutrition, systems modeling,
and scientific and regulatory affairs, with academic, industry, and
global perspective. My academic career has focused on building
collaborations to assure effective public-private partnership and
stakeholder engagement to advance food and feed security, safety,
defense, and supply-chain resilience. Prior to joining the University
of Minnesota, I held numerous leadership positions at a multinational
food company operating in 70 countries where I provided nutrition,
regulatory, and scientific affairs expertise across their human food
and animal feed portfolios. I have more than 130 global patents and
patent applications covering specialty ingredients, processing
technology, packaging innovations, and biology-based dynamic modeling
formulation systems.
Background
Cyber risk is not new to the food and agriculture sector, but the
risk of significant business disruption and significant national
security threats from cyberattack are growing.\1\ Traditional
information technology (IT) in the form of email, data storage, records
retention, and point of sale activities are ubiquitous and have been
for many years. These systems are updated regularly with most food
firms relying on in-house, or third-party, IT providers to manage
cybersecurity for their systems.
---------------------------------------------------------------------------
\1\ Food Protection and Defense Institute. 2019. Adulterating More
Than Food: The Cyber Risk to Food Processing and Manufacturing. https:/
/hdl.handle.net/11299/217703.
---------------------------------------------------------------------------
The newer cyber risk in the food and agriculture sector is the
growing dependence upon cyber-based information and operational
technology (OT) systems used to perform an ever-expanding variety of
normal operating procedures. The operational technology systems,
including industrial control systems and internet-connected sensors,
controllers, and devices (sometimes referred to as the internet of
things or IoT), manage the most critical aspects of food production,
typically have the lowest level of integrated cybersecurity
protections, and are often not included in enterprise cybersecurity
plans, protections, and training.
Two pieces of operational technology illuminate aspects of cyber
risk in the food and agriculture sector. First, a pasteurizer in a
fluid milk or juice manufacturing facility is critical to assuring the
food safety of those products. The pasteurization time and temperature
are controlled by sensors communicating with control systems monitored
remotely by food safety professionals. Second, in beef harvest
facilities, carcasses must be split into right and left halves prior to
further processing. This splitting is increasingly being done by
robotic carcass splitters. If either of these pieces of equipment are
compromised through a cyberattack, the facility would be required to
shut down and economic consequences would result. Depending upon the
type of cyberattack and the speed at which it is detected, other
consequences may also occur. For example, if the pasteurizer is
compromised, it may inaccurately, and possibly even maliciously, report
and record that acceptable food safety metrics were reached--even
though they were not--resulting in unsafe product being distributed and
wide-scale human health harm. Cyberattack on the carcass splitter could
result in serious worker injury to human operators present in those
areas.
Although the above examples are hypothetical and used to illustrate
types of technology at risk of cyberattack, the concept of cyberattack
in the food and agriculture sector is not hypothetical. It has been
occurring for years and is gaining recognition as a significant threat
to business continuity and national security. In fact, Dragos, Inc.
reported that ransomware attacks on industrial entities increased more
than 500% from 2018 to 2020.\2\
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\2\ Larson and Singleton. 2020. Ransomware in ICS Environments
(https://hub.dragos.com/hubfs/Whitepapers/Ransomware in ICS
Environments_Dragos 2020.pdf).
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History of Cyber-Attacks in the Food and Agriculture Infrastructure
As early as 1998, cyber criminals targeted the food and agriculture
sector with denial-of-service attacks, e-commerce thefts, and
intellectual property thefts. However, most of these attacks had
limited public exposure to avoid brand damage. The more recent
cyberattacks have evolved to compromise networks, disrupt operations,
and/or exfiltrate vast amounts of data. The scale of these recent
attacks, in terms of ransoms paid and levels of operational disruption
due to the significant consolidation across the sector, make such
events difficult to keep from the public eye. To make matters worse,
the rise of cryptocurrency payments to end the attack and recover data
makes it exceptionally hard for law enforcement to identify the
criminal organization and track and recover payments.
Since late 2020, major cyber incidents (e.g., SolarWinds, E&J
Gallo, Molson Coors, Colonial Pipeline, JBS, Kaseya, and others) have
severely disrupted the ability to conduct business for many companies
in the food and agriculture sector. With many of these companies paying
ransom to end the attack, it is likely that attacks will continue. In
addition, the pandemic highlighted how food and agriculture sector
consolidation and interdependencies increase not only risk of
disruption but also the probability that accompanying publicity will
result in increased targeting of food and agriculture sector
infrastructure. Ransomware, data theft, and operational disruption are
not the only issue. As shown with water treatment facilities in
California and Florida, cyberattacks are also intended to harm health.
In these attacks, water disinfection chemical levels were adjusted to
harmful levels.
Implications of the Growing Cyber Risk in the Food and Agriculture
Sector
The food and agriculture sector is incredibly diverse. It is
composed of facilities ranging from small businesses and family farms
to multinational corporations that produce an infinite variety of
foods. Some aspects of the food and agriculture sector are highly
distributed, while some are highly consolidated. Each and every
business, farm, production facility, and company is individually
vulnerable to cyberattack. On a broader scale, however, the food system
is one of the most interconnected and interdependent systems within the
critical infrastructures. Relationships among food companies can
include supplier, customer, and competitor simultaneously. These
interconnections often mean that data flows routinely and fluidly
across the sector. From a cyber perspective, this amplifies the attack
surface and the risk. It also amplifies the potential magnitude of
system disruption and failure from a cyberattack, including its
secondary and tertiary cascading impacts.
The food and agriculture sector is labor intensive. However, a
history of labor shortages coupled with technology advancements have
driven automation in the sector. The changing worker health provisions
and expectations exacerbated by labor shortages during the pandemic
have only accelerated the motivation within the food and agriculture
sector to increase automation. However, with every advancement comes
unintended consequences. With increased automation and the concomitant
rise in computational and network complexity, cyber risk also
increases.
Regardless of why cyber risk exists, cyberattacks have the
potential to cause catastrophic disruption and endanger national
security concerns. For example, the recent JBS cyberattack disrupted
meat processing operations in several countries and simultaneously
caused disruptions to supply chains, logistics, and transportation to
customers. And it increased consumer prices. This amplification of
disruption can easily result in national security threats depending
upon the scale of attack and subsequent disruption.
As a hypothetical example of a national security threat, consider
for a moment the impact if both of the only two HDPE pellet plants that
produce the gallon milk jug pre-forms were the victims of a
simultaneous cyberattack? We know that during Hurricane Katrina when
just one of these HDPE facilities was compromised, the supply of fluid
milk at the consumer level plummeted to shortage levels in many areas
of the country while dairy farmers dumped millions of gallons of milk.
A situation, such as this, could be repeated and affect a broad area of
the nation in the event of a targeted cyberattack.
Our FPDI research and experience engaging with food system
stakeholders led us to identify the following primary (but not
exclusive) causes for cybersecurity risk to agricultural and food
products supply chains:
Lack of awareness throughout the sector of the scale of
cybersecurity risks to agricultural and food processing and
manufacturing and the potential consequences if those risks
were realized.
Lack of regulatory guidance and clarity regarding how
cybersecurity risks should be accounted for and addressed in
assessing food safety risks.
Lack of standards for the cybersecurity of agricultural and
food processing systems, both for the operation of those
systems and for the design and development of the software and
hardware that comprise them.
Lack of research and vulnerability assessment data upon
which to make evidence-based cybersecurity risk mitigation and
policymaking decisions. This especially hampers the ability to
prioritize the most vulnerable products or processes for
mitigation efforts.
Lack of cybersecurity education and training among
operations technology personnel and lack of control systems
knowledge among information technology personnel tasked with
cybersecurity at agriculture and food companies. This is
particularly acute at small- and medium-sized businesses.
It should also be recognized that although some food and
agriculture sector partners may recognize the risk, constraints exist
in their ability to manage that risk. They must balance a multitude of
supply chain, food safety, labor, financial, and other operational
risks in addition to cyber risk. Not only does managing cyber risk
increase operational costs, but there are also very few experts with
the knowledge and experience to effectively enhance cybersecurity in
the food and agriculture operational environment. This type of expert
is often recognized as irreplaceable and are sometimes referred to as
`unicorns' within the food industry. We need to train and field many
more of them.
Recommendations for enhanced cyber resilience
Current Federal law (the Food Safety Modernization Act) specifies
that covered facilities must establish and implement a food safety
system that includes an analysis of hazards and risk-based preventive
controls. Regulations promulgated by FDA require a written food safety
plan that includes steps for hazard analysis, preventive controls,
oversight and management of preventive controls, monitoring, corrective
actions, and verification. Few of these steps can be undertaken without
information technology, industrial control systems, and internet-based
communication systems. Any compromise of these supporting systems
jeopardizes implementation of these critical food safety procedures,
including the process controls that must be addressed in hazard
analysis and protective strategies, as well as others such as product
testing and environmental monitoring. In addition, more historical FDA
regulations address electronic records creation, accuracy, and
retention. However, aspects of the food and agriculture sector may not
be covered by these regulations (e.g., USDA-regulated food facilities,
farm-level production, etc.) and none of the current regulations
address cybersecurity of the systems required to acquire, manage, and
preserve these records.
As provided in the FPDI comments offered in response to ``Notice:
Supply Chains for the Production of Agricultural Commodities and Food
Products, Request for Public Comments'', I, as Director of FPDI,
recommend the following actions:
USDA should take the lead in developing new minimum
information technology risk reduction regulations and develop
new Good Manufacturing Practices (GMPs) specific to the
production agriculture and food and beverage industries. These
could be developed as a new set of cyber preventive controls to
be consistent with the implementation of other Food Safety
Modernization Act (FSMA) requirements. This action should be
taken in concert with industry, the Department of Homeland
Security (DHS), the Food and Drug Administration (FDA), and the
Federal Bureau of Investigation (FBI).
USDA, in collaboration with FDA, should develop sector-
specific system risk reduction measures, facility-level
cybersecurity risk reduction plans, and operator guidelines and
training. They should also develop specific preventive controls
training and reporting for cyber systems within the food and
agriculture sector.
USDA should host a series of cybersecurity review and
technology forums or similar events for food and agriculture
sector senior management to accelerate the education of senior
leadership within industry. Senior leadership needs a better
understanding of the cyber risks and the importance of
investing in risk reduction for cyber systems, especially in
the food and agriculture operating environment. This action
should occur in partnership with the insurance industry, the
cybersecurity industry, FDA, FBI, and DHS,
USDA should develop a university-based food and agriculture
sector focused cyber Center of Excellence to conduct research
and education that aids in cyber risk reduction.
USDA should collaborate with industry and DHS to establish
an Information Sharing and Analysis Center (ISAC). The mission
of this ISAC should be to understand evolving food and
agriculture sector cyber risks as they may impact both
individual facilities and entire supply chains, anticipate
local and broad supply chain exposures, and monitor cyber
technology shifts and emerging cyber-based or control
technology risks across all aspects of the food system.
Closing Remarks
Securing the vast cyber-infrastructure and electronic information
systems sustaining America's food and agriculture supply system is
vital to the economic vitality of the system and our nutritional and
national security. If we do not act, we risk the nation's ability to
provide a sufficiency of nutrition, the very essence of well-being for
our friends, family, colleagues, constituents and institutions.
I, and the Food Protection and Defense Institute, appreciate the
opportunity to engage in and contribute to this national discussion of
our food system's resilience.
Thank you. I look forward to further discussion on this important
topic.
The Chairman. Thank you very much, Dr. van de Ligt, and we
look forward to our opportunity to ask you about what sorts of
private-public partnerships we can pursue to reinforce our
vulnerabilities against cyberattacks, and that opportunity will
come shortly.
Our third witness today is Dr. Keri Jacobs. Dr. Jacobs
holds an MFA Chair in Agribusiness, is a graduate of the
Institute of Cooperative Leadership Fellows, an Associate
Professor of Agriculture and Applied Economics at the
University of Missouri, the Show Me State. Her research
explores consolidation and catalysts and impacts among Midwest
agriculture cooperatives and the benefits of increased supply
chain participation by producers, very appropriate for today's
Subcommittee hearing.
She received her bachelor of arts in economics--associate
degree, excuse me, business administration from Coe College,
and a Ph.D. in economics from North Carolina State University.
Again, enjoying the multitude of universities of this wonderful
country of ours.
Dr. Keri Jacobs, please open on your statement this
morning.
STATEMENT OF KERI L. JACOBS, Ph.D., ASSOCIATE
PROFESSOR OF AG AND APPLIED ECONOMICS; MFA CHAIR IN
AGRIBUSINESS; DISTINGUISHED FELLOW, DIVISION OF APPLIED SOCIAL
SCIENCES, COLLEGE OF AGRICULTURE, FOOD AND NATURAL RESOURCES,
UNIVERSITY OF
MISSOURI, COLUMBIA, MO
Dr. Jacobs. Thank you, Chairman Costa, Ranking Member
Johnson, and Members of the Subcommittee. Thank you for the
invitation to participate in this discussion regarding producer
ownership in our beef supply chain.
As an economist, I believe in the power and elegance of
capitalism. The pursuit of profitability through private
ownership, private control, and private returns fuels
innovation and efficiency. My testimony today is not about the
economics of the beef supply chain; however, through
cooperation, pricing information exchange, and other market
dimensions can be improved and sustained.
In 1922, in response to growing imbalances and tensions in
ag, not unlike what we see in here today, Congress authorized
producers to form cooperatives, the law known as the Capper-
Volstead Act. In doing so, Congress provided a mechanism for
producers to have equal footing with the big companies they
purchased from and sold to. The requirements of Capper-Volstead
are that the co-op be governed by its producer-members, be
capitalized by them, and that those producers share in the
profitability of those business activities. Those requirements
helped co-ops bring discipline to markets. Instead of focusing
on short-term profitability, the cooperative transfers the
value from the upstream and downstream markets back to its
producer-members.
The question this Committee, the Subcommittee, and the
industry contemplates is whether producer ownership is a way
forward for this industry. You have heard testimony of the
significant scale economies that exist in beef processing----
The Chairman. Pardon me. Could you repeat that one more
time?
Dr. Jacobs. Yep. I said--I started with--the question this
Subcommittee and the industry contemplates is whether producer
ownership is a way forward for the industry. You have heard
testimony of the significant scale economies that exist in beef
processing, suggesting that small scale processing to commodity
markets is unlikely to be sustainable long-term.
Rather than working against scale economies, one option is
to support livestock producer ownership to an efficient scale.
We do have examples of large-scale producer ownership in pork.
Triumph Foods is producer-owned and its structure reflects the
characteristics of cooperatives that discipline a market. The
producer-owners have long-term contracts to sell hogs, and they
effectively earn wholesale meat prices for their animals.
Concentration of livestock industry, particularly at the
processing stage, seems inevitable from the efficiency lens.
Through cooperation, however, livestock producers can flip the
script and participating in generating and receiving the value
this efficiency creates. Producer ownership in beef processing
is possible, and it has the potential to improve conditions for
beef producers in the entire supply chain. When at scale,
producer ownership can smooth variability in producer incomes
because it allows them to capture income from downstream
markets that may be less volatile. More of the value-added
income stays in the producers' rural communities and the
cooperatives' communities instead of flowing to investors.
To accomplish this, livestock producers must coordinate and
commit production via contracting. They likely need assistance
in overcoming challenges such as selling byproducts from
processing and addressing uniformity in feedstock supplies. I
encourage Congress to consider the additional policies and
actions that can improve the likelihood of an adoption and
success of producer ownership in beef processing, and the
successes of livestock producers.
Among these are investments in research to understand
minimum efficient scale in beef processing and the producer
commitment it will require. Temporarily subsidizing evidence-
based scalable capacity, creating a loan guarantee that reduces
risk to lenders to beef--excuse me, producer-owned beef
finishing, and ensuring financing is available earlier in their
investment period, preserving these market products and
investments to relabeling laws, and finally, coordinating
technical assistance for producers interested in forming
cooperatives, helping them gain traction in a start-up period,
and helping them as they navigate market coordination with
their downstream partners.
I began my testimony by stating my belief in capitalism.
Through my work with cooperatives and their producer-members, I
do appreciate the collective action model as a workhorse of
capitalism in agriculture. Cooperation takes a holistic view of
the agricultural supply chain. With temporary assistance and
the appropriate policies, producers can work within the
parameters of scale and benefit from it. Capitalism through
cooperation by producers enables even the small producer to
improve his or her economic situation. This form of capitalism
can improve economic conditions in rural communities, and it
pays attention to the whole supply chain.
Mr. Chairman, thank you for this opportunity to join the
discussion. I look forward to your questions.
[The prepared statement of Dr. Jacobs follows:]
Prepared Statement of Keri L. Jacobs, Ph.D., Associate Professor of Ag
and Applied Economics; MFA Chair in Agribusiness; Distinguished Fellow,
Division of Applied Social Sciences, College of Agriculture, Food and
Natural Resources, University of Missouri, Columbia, MO
Chairman Costa, Ranking Member Johnson, and Members of the
Subcommittee, thank you for this opportunity to testify regarding the
potential for producer-ownership in the U.S. beef supply chain. I am an
agricultural economist at the University of Missouri. As an extension
specialist, I have spent 10 years working closely with producers and
the cooperatives of which they are member-owners. My extension work
supports the governance roles and financial acumen of cooperative
directors and educates producers, students, and the public about
cooperatives. My research considers the evolving agribusiness landscape
as it relates to consolidation in Midwest agriculture, the challenges
facing agricultural cooperatives and producers, the role and value of
cooperation, and the benefits to producers as they participate more
fully along their supply chains.
As an economist, I believe in the power and elegance of capitalism.
The pursuit of profitability through private ownership, private
control, and private returns fuels innovation and efficiency. I also
believe that sustainable capitalism must take a holistic view of
markets, and this requires competitive markets--where no single entity
has undue control or influence on the pricing or availability of a
product or service that disadvantages others in the supply chain. An
equally important feature of capitalism is market efficiency--where
coordination of market activities minimizes costs; permits free
exchange of information; and leads to an appropriate allocation of
resources, goods, and services. Although my testimony today is not
about pricing, concentration, market power, information exchange, or
efficiency in the beef supply chain, these are all dimensions that can
be improved and sustained through producer-ownership. Cooperatives
bring discipline to a supply chain, and this discipline is critical to
efficient and competitive markets.
Cooperatives are a special type of corporation. They are
distinguished from traditional corporations by their ownership
structure, who makes the decisions and how, and who benefits from their
activities. Traditional corporations are investor-owned. Investors
contribute equity capital privately or buy shares of a company's stock.
The value of that investment depends on the corporation's
profitability. Investors benefit when the shares of their stock
increase in value and when the corporation pays dividends on those
shares. The more you invest, the more voting power you have and the
more you benefit from the business' success. Investors expect a return
on their investment, and management's job is to ensure that. No
requirements stipulate that these investors are otherwise linked to the
business, and most often they are not. Furthermore, the board of
directors--the corporation's governing body--has no requirements to be
actively involved otherwise in the supply chain. This creates a
situation where the corporation makes decisions in the best interest of
its investors by looking at its bottom line. Beyond ensuring that it
meets the needs of suppliers and buyers, the business has little
incentive to share the benefits of its activities upstream or
downstream.
A supply chain--or part of a supply chain--dominated by a few very
large, investor-owned firms that pay most attention to their immediate
economic needs can become undisciplined and lack sustainability from a
holistic market viewpoint. This was precisely the situation our nation,
producers and consumers faced in the early 1900s. Producers trying to
market and distribute their products were outsized and subject to
unfair trade terms and pricing. Congress recognized that the supply
chains in grain, dairy, and other critical sectors left producers with
too little control, subjected producers to predatory pricing, and
distorted the prices that consumers paid. In 1922, in response to the
growing imbalances, Congress authorized producers to form associations,
or cooperatives, through the law titled ``An Act to Authorize
Association of Producers of Agricultural Products''--more commonly
known as the Capper-Volstead Act. By permitting producers to form
associations to collectively process, prepare for market, handle, and
market their products, Congress provided a mechanism for producers to
have equal footing with the big companies with which they did business.
The law did include several requirements. Those requirements, which
state statutes governing cooperatives and producer associations
subsequently reinforced and enumerated, are embodied in the Principles
of Cooperation. Among these are the following:
1. Open and Voluntary Membership: There is no requirement to become
a member. Producers participate voluntarily so long as they
can use a cooperative's services and accept the
responsibilities of membership, regardless of race, age,
religion, gender, and economic circumstances.
2. Democratic Member Control: Members actively participate in
setting policies and making decisions through a democratic
process that is independent of their equity contribution.
The cooperative is governed by a board of directors elected
by and from among the membership. The board is accountable
to those members.
3. Economic Participation: Members contribute capital equitably, and
the association operates for the benefit of its members.
Profitability is shared with the membership proportional to
members' use, and the cooperative can allocate surpluses
for growth; reserves; and other activities, including
investments in their communities, approved by the
membership.
Capper-Volstead created a vehicle for a nearly inextricable link
between producers and their supply chains--however far into it they
choose to organize vis-a-vis cooperation. This structure and its
requirements are precisely why we say that a cooperative brings
discipline to a market. Instead of focusing on short-run profits, the
cooperative seeks to aggregate and transfer the value further along the
supply chain back to its producer-members. In contrast to a traditional
investor-owned corporation, a cooperative's incentives are aligned with
the interests of those who do business with it because they are the
ones who provide equity capital, make decisions, oversee its
operations, and benefit from its activities. Furthermore, those owning,
controlling, and benefitting from the business live in the communities
in which the cooperative operates. Producer-members have an incentive
to ensure that the business acts responsibly in the community.
According to the USDA's 2019 Agricultural Cooperative Statistics
Report, more than 1,700 U.S. producer-owned agricultural cooperatives
operate more than 9,000 locations in the U.S. and have nearly 1.9
million voting producer-members. You may recognize cooperatives such as
Land O'Lakes, Dairy Farmers of America, and Organic Valley--dairy
marketing and processing cooperatives that each uniquely provide their
producer-members with access to supply chains for dairy and its
products. Blue Diamond Growers; Florida's Natural Growers; the Ocean
Spray Cooperative; and the National Grape Cooperative Association,
which owns the Welch's brand, are composed of independent growers who
control and own their respective supply chains from production to
product branding to retailing. Hundreds of local and federated grain
marketing and input supply cooperatives including Ag Processing (AGP),
CHS, GROWMARK, MFA Inc., and Southern States give grain producers
sufficient scale to collectively purchase inputs, market their grain,
and expand into value-added markets. Producers even participate in
financing their own operations and their cooperatives through
ownership, governance, and risk- and profit-sharing in financial
cooperatives such as the Farm Credit System and CoBank. Each of these
cooperatives has succeeded in improving producers' control in the
marketplace, facilitating greater coordination, adding value to
producers' operations and income through profit- and risk-sharing, and
improving their rural communities.
I want to address a common misunderstanding, too, about
cooperatives and collective action by producers--that is, that big
cooperatives act just like big corporations and eventually seek to
maximize their own profitability. A company, even a monopolist, that is
owned by producers and required to be governed by those producers and
share profits with those producers will still reflect a competitive
outcome. This is because the company will allocate its profits back to
those producers. Even if the cooperative earns very high margins, it
shares the returns with producers proportional to their business. This
effectively increases the net price a producer receives for her or his
or her output or decreases the price a producer pays for a product or
service. Producer-owners decide how and how much of the profitability
to allocate and how much to retain for investments in the cooperative's
assets, relationships, and innovation that enhance producers'
production, efficiency, or competitiveness in value-added markets. This
is, again, what I mean when I say that cooperatives are a disciplining
factor in markets. Cooperatives reflect the values and needs of their
producer-members, and they do so by prioritizing people, communities,
and values over maximizing profits.
We do have successful, large-scale producer-ownership in livestock,
specifically in the pork industry. Triumph Foods is a producer-owned
LLC, and its operation reflects the features of cooperatives I have
described. In its model, each producer commits to deliver a specific
number of hogs to the plant each year, and producer-members provide a
proportionate share of the plant construction cost. Producers are free
to deliver surplus hogs to other processors. Meat produced at the plant
is marketed by Seaboard Foods, and the producer-owners are paid based
on the dollars generated by these wholesale sales. The producer-owners
have a long-term contract to sell hogs and effectively earn wholesale
meat prices for their animals.
The question this Subcommittee and the beef industry contemplates
is whether producer-ownership--through cooperatives or other forms of
collective action--can be a way forward for this industry. You have
heard testimony about the significant scale economies that exist in
beef processing, suggesting that small-scale processing to commodity
markets is unlikely to be sustainable in the long term. Country Natural
Beef is a cooperative representing more than 90 family-owned ranches in
the western U.S. It began in 1986 and is still operating today. The
business processes approximately 500 head of cattle per day. The
producer-owners collectively engage in custom processing, packaging,
and marketing of their beef through local retail stores, and the
ranchers capture profits from raising cattle through processing. Every
rancher is an owner and serves on the board of directors. Grass Roots
Farmers' Cooperative and Buckeye Valley Beef Cooperative are smaller-
scale examples of beef processing for niche and value-added markets,
and they sell direct to consumers as well. To my knowledge, however,
there is currently no large-scale producer-ownership in beef finishing
or processing to traditional markets or that can compete with the very
large processors. I can only speculate about the reasons for this. Beef
processing has significant scale economies due in part to labor
intensity and specialization, the enormous up-front capital investment,
and the requirement of a predictable daily intake of a consistent
feedstock, which I understand has proven problematic due to the
diversity in cattle genetics and cattle production's long biological
cycle. The sum of these confounding factors is likely why a small,
collective-action model has not emerged with long-term success.
There is a path forward that recognizes concentration in beef
processing for traditional markets may be inexorable, even preferred,
due to the scale economies that exist. Rather than working against
scale economies, one option is to support producer-ownership to an
efficient scale. A producer-owned supply chain from the cow-calf stage
through processing that reaches a profitable minimum efficient scale in
terms of per-head margins will have a different outcome in producer
profitability than we see today. We need research to understand the
minimum scale. Coordination along the supply chain by producers, when
done at scale, can smooth variability in producer incomes by capturing
income from downstream markets that are less volatile. The income
producers and their cooperatives generate will flow to the rural
communities where they operate instead of to investors. Importantly,
this model places producers closer to consumer markets and allows
coordination between consumer preferences and production decisions.
Concentration in the beef industry, particularly at the processing
stage, seems inevitable from an economic sustainability lens. Through
cooperation, however, producers have an opportunity to flip the script
and participate in earning value that this efficiency creates. Beef
producers must desire to coordinate and commit production to the effort
via contracting. Challenges related to selling byproducts, such as
offal and hides, and uniformity of feedstock supply through genetics
must be addressed. With this in mind, I encourage Congress to consider
five actions that could improve the likelihood of adoption, success,
and outcomes of beef producers participating in collective action.
1. USDA invests into research on minimum efficient scale in beef
processing and the commitments needed to achieve it.\1\
---------------------------------------------------------------------------
\1\ A 2013 USDA ERS Economic Research Report (No. 150), ``Local
Meat and Poultry Processing: The Importance of Business Commitments to
Long-Term Viability'' (https://www.ers.usda.gov/webdocs/publications/
45094/37949_err-150.pdf?v=5131.8) by Gwin, Thiboumery, and Stillman is
a model for this investigation.
2. Temporarily subsidize demonstrated or evidence-based scalable
---------------------------------------------------------------------------
capacity.
3. Create a loan guarantee programs that reduce risks to lenders for
producer-owned beef finishing, processing, and marketing
and that ensure financing is available earlier in the
investment period.
4. Preserve niche-market products and investments through labeling
laws.
5. Provide technical assistance for producers to form associations
or cooperatives, gain traction in the start-up period, and
navigate market coordination with downstream partners.
I began my testimony by stating my belief in capitalism. Through my
work with cooperatives and the producers who own and control them, I
have come to appreciate the cooperative model and collective action by
producers as a workhorse of capitalism in agriculture and a way of
conducting business that has benefits well beyond private returns to
investors. Concentration in the U.S. beef supply chain may be
inevitable due to economies-of-scale. In this case, market discipline
is critical. With temporary assistance, producers can work within the
parameters of scale and benefit from it by utilizing a coordinating
model, such as cooperation. This form of capitalism enables even the
little guy to participate and improve her or his economic situation.
This form of capitalism can improve economic conditions in rural
communities. This form of capitalism pays attention to the whole of the
supply chain--from producer to consumer. Through collective action,
producers have the ultimate incentive to ensure the safety, security,
and sustainability of their supply chains. Their livelihood depends on
it.
Mr. Chairman, thank you for the opportunity to discuss the
potential of producer-ownership in the beef supply chain. I look
forward to your questions.
The Chairman. Thank you very much, Dr. Jacobs, for your
very informative testimony, and we will look forward to the Q&A
portion.
Our last witness, certainly but not the least, is Dr.
Dustin Aherin. Dr. Aherin is an Animal Protein Analyst at Rabo
AgriFinance. I think many of us know that Rabo AgriFinance has
a great presence in providing lending activity throughout
American agriculture, a well-respected financial institution.
Dr. Aherin within animal protein concentrates his work on
beef. Aherin has a unique combination of commercial beef
production experience and analytical training. He joined
RaboResearch after completing his Ph.D. at the Beef Cattle
Institute at Kansas State University, and he also holds a
bachelor's and master's degree in animal science from Kansas
State. It looks like, Dr. Aherin, you have stayed in Kansas,
but good for you, and we look forward to your testimony.
STATEMENT OF DUSTIN AHERIN, Ph.D., VICE PRESIDENT, RaboResearch
ANIMAL PROTEIN ANALYST, RABO AgriFinance, CHESTERFIELD, MO
Dr. Aherin. Thank you, Chairman Costa, Ranking Member
Johnson, and Members of the Subcommittee. Thank you for
inviting me to join the discussion today.
As an Animal Protein Analyst for Rabobank, which is engaged
across the entire beef supply chain, I assist in strategic
decision-making for both the bank and the bank's clients by
offering a research-based perspective on fundamental market
dynamics and future trends.
Major U.S. beef supply chain disruptions over the past 2
years have sent the cattle and beef industry into uncharted but
explainable territory. The imbalance of excess market ready
cattle supplies in the face of reduced operational packing
capacity has put downward pressure on cattle prices. Meanwhile,
consumer demand for beef and all animal proteins has reached
record levels. These dynamics, combined with elevated
processing costs, have increased the spread between beef price
and cattle price, just as economic principles, past research,
and historical relationships would suggest. Both the direction
and magnitude of the price grid are well within the range of
expectation.
The pandemic has created enormous challenges for cattle
producers. Seeing the price difference between cattle and beef
has only added to the emotional strain. I understand the
frustration. I have owned and bred cattle most of my life, and
I have friends and family that make a living ranching and
feeding cattle. However, with stakeholders that are invested
throughout the entire supply chain, from rancher to packer to
retailer, I must look at the beef industry from an objective
and analysis-based perspective.
First, cattle are not beef. Cattle are one of several
inputs in the beef production. Other major inputs include
labor, physical capital, and technology. These inputs are
always seeking but never finding the perfect balance. This
creates cycles. Input imbalances are communicated through
prices, whether that is cattle prices, wages, or investments.
In recent years, extreme and unexpected events have
severely restricted several of these inputs. Examples include
facilities in the August 2019 plant fire and labor during the
pandemic. A working market sends price signals to adjust. These
same price signals created record high cattle prices and packer
losses in 2014 and 2015.
The biology of the beef industry makes it slow-moving and
capital intensive. Adjustments take years. While recent
unforeseen events have exacerbated the situation, the
foundation for today's circumstances was laid over several
decades. Beef packing has historically been a low margin
business. In the year 2000, the U.S. harvested nearly 30
million head of fed cattle. By 2015, fed cattle slaughter was
under 23 million head. Throughout this period of cattle supply
contraction, the most inefficient packing plants were driven
out of business as competition for limited cattle supplies
drove cattle prices to record highs. From 2000 to 2015, U.S.
beef industry experienced a net decline of roughly 14,000 head
per day and fed cattle processing capacity. Even before the
extremes of 2020, recent margins suggest opportunity to add
operational packing capacity; however, that opportunity comes
with significant risk. Based on recent new plant announcements
in the current environment of high construction costs, the new
plant currently costs roughly $200 million for every 1,000 head
of daily capacity. Then a new endeavor must meet regulatory
requirements, build a labor force, and keep enough cash on hand
to absorb losses. Most crucially, it is not just about building
facilities. It is about building a business model. To compete
against the efficiency of large incumbent packers, new entrants
will likely have to build a differentiated premium brand
strategy. Differentiated beef requires differentiated cattle.
Alternative marketing agreements are the best way to secure a
consistent supply of such differentiated cattle. Strong
vertical supply chain relationships will be critical to the
success of any new beef business.
In response to market signals, numerous plans for
greenfield plants or expansions of existing facilities have
been unveiled in recent months. If all of the announced plans
for plant construction and expansion come to fruition, more
than 8,000 head of daily fed cattle capacity could be added to
the U.S. beef industry over the next 5 years. Recognizing
current drought conditions, if the beef cow herd declines by
two percent or less, there is opportunity for about 5,000 head
per day of profitable packing expansion.
A note of caution. There is a point where industry capacity
goes too far to withstand cyclical periods of tight cattle
supplies. Drought risks and cyclical fundamentals must be
considered. Additional operational capacity does not solely
have to come from new facilities. Increased technology
implementation will be critical to success. Recently, many
packers have revitalized their focus on technology development.
Enlightened by the pandemic to the longstanding labor shortages
in the meat industry, startups are also bringing outside
expertise to advance technology and automation. One percent
improvement in volume efficiency across all existing plants
would add 1,000 head of daily fed cattle processing capacity.
2020's cattle backlog is nearly cleared. Year over year
cattle prices are already improving, and should continue to do
so through the second half of 2021 and beyond. In conjunction
with tightening cattle supplies, capacity expansion will come
online over the next several years, and new technologies will
reduce labor constraints, further shifting margins to the
benefit of cattle producers.
In closing, the recent shocks to the beef industry have
presented the entire beef supply chain with enormous
challenges. The resulting price movements have been frustrating
for cattle producers, to say the least, yet these same price
movements and supply chain disruptions have also contributed to
the accelerated investment in packing capacity expansion, new
technologies, and new business strategies that will help the
beef industry adapt and evolve to ever-changing demand, and
that is the market at work. Thank you.
[The prepared statement of Dr. Aherin follows:]
Prepared Statement of Dustin Aherin, Ph.D., Vice President,
RaboResearch Animal Protein Analyst, Rabo AgriFinance, Chesterfield, MO
Chairman Costa, Ranking Member Johnson, and Members of the
Subcommittee, thank you for inviting me to join the discussion today.
As an animal protein analyst for Rabobank, which is engaged across the
entire beef supply chain, I assist in strategic decision making for
both the bank and the bank's clients by offering a research-based
perspective on fundamental market dynamics and future trends.
Summary
Major U.S. beef supply chain disruptions over the past 2 years have
sent the cattle and beef industry into uncharted, but explainable
territory. The imbalance of excess market-ready cattle supplies in the
face of reduced operational packing capacity has put downward pressure
on cattle prices. Meanwhile, consumer demand for beef and all animal
proteins has reached record levels, fueled by pandemic stockpiling,
increased and reallocated consumer income, and more recently,
restaurant re-openings, not to mention export demand. These dynamics,
combined with elevated processing costs, have increased the spread
between beef price and cattle price, just as economic principles, past
research, and historical market relationships would suggest. Both the
direction and magnitude of the price spread are well within the range
of expectation.
Like many businesses, the pandemic has created enormous challenges
for cattle producers. Seeing the price difference between cattle and
beef has only added to the emotional strain. I understand the
frustration. I've owned and bred cattle most of my life, and I have
friends and family that make a living ranching and feeding cattle.
However, with stakeholders that are invested throughout the entire
supply chain, from rancher to packer to retailer, I must look at the
beef industry from an objective, analysis-based perspective.
First, cattle are not beef. Cattle are one of several inputs into
beef production. Other major inputs include labor, physical capital,
and technology. These inputs are always seeking, but never finding, the
perfect balance between one another. This creates cycles. Input
imbalances are communicated through prices, whether that's cattle
prices, wages, or investments. Over the past several years, extreme and
unexpected events have severely restricted several of these inputs.
Examples include facilities in the August 2019 Tyson plant fire and
labor during the pandemic. A working market sends price signals to
adjust. These same price signals created record high cattle prices and
packer losses in 2014 and 2015.
The biology and natural time-delays of the beef industry make it
slow moving and capital intensive. Adjustments take years. While
recent, unforeseen events have exacerbated the situation, free market
signals, economic losses, drought, and the natural cattle cycle laid
the foundation for today's circumstances over several decades.
Beef packing has historically been a low margin business. In the
year 2000, with a total cattle population of 98 million head, the U.S.
harvested nearly 30 million head of fed cattle. By 2014 and 2015, the
total cattle population was below 90 million head with 2015 fed cattle
slaughter under 23 million head. Throughout this period of largely
drought induced beef cow herd contraction, the most inefficient packing
plants were driven out of business as competition for limited cattle
supplies drove cattle prices to record highs. From 2000 to 2015, the
U.S. beef industry experienced a net decline of roughly 14,000 head per
day in fed cattle processing capacity.
Even before the extremes of 2020, recent margins suggest that there
is opportunity to add operational packing capacity. However, that
opportunity does not come without significant risk. First, the up-front
cost of a new or expanded plant is extremely expensive. Based on recent
new plant announcements and the current environment of high
construction costs, a new plant currently costs roughly USD 200m for
every 1,000 head of daily capacity. Then, a new endeavor must meet
regulatory requirements, build a labor force, and keep enough cash on
hand to absorb losses.
Most crucially, it's not just about building facilities, it's about
building a business model. Competing in commodity cattle markets
against the efficiency of large, incumbent plants would be extremely
difficult for a new entrant. However, if a new entrant can capitalize
on a differentiated branding strategy, the premium component may be
enough to offset efficiency disadvantages. Differentiated beef requires
differentiated cattle. Alternative marketing agreements are the best
way to secure a consistent supply of such differentiated cattle.
Strong, vertical supply chain relationships will be critical to the
success of any new beef business.
In response to the described market signals, numerous plans for
greenfield plants or expansions of existing facilities have been
unveiled in recent months. These plans come from new entrants, minor
incumbents, and major incumbents alike. If all of the announced plans
for plant construction and expansion come to fruition, more than 8,000
head of daily fed cattle capacity could be added to the U.S. beef
industry over the next 5 years. Recognizing current drought conditions,
if the beef cow herd declines by 2% or less, there's opportunity for
about 5,000 head per day of profitable packing capacity expansion.
A note of caution. There is a point where industry capacity
expansion goes too far to withstand cyclical periods of tight cattle
supplies. The long-term cattle cycle, drought risks, and market
fundamentals must be considered.
I want to emphasize that additional operational capacity does not
have to come solely from new facilities. Whether in new or existing
plants, increased technology implementation will be a critical
component of future success. Recently, many packers have revitalized
their focus on technology development as a means to address labor
challenges, manage processing costs, and reduce product waste.
Enlightened by the pandemic to the long-standing labor shortages in the
meat industry, many startups are also bringing outside expertise and
perspectives to advance technology and automation in the meat supply
chain. Even a one percent improvement in volume efficiency across all
existing plants would add 1,000 head of daily fed cattle processing
capacity.
With any luck, we will work through the long tail of 2020's cattle
backlog in Q3 2021. Year-over-year cattle prices are already improving
and should continue to do so through 2H 2021 and beyond. In conjunction
with tightening cattle supplies, capacity expansion will come online
over the next several years and new technologies will reduce labor
constraints, further shifting margins to the benefit of cattle
producers.
In closing, the shocks to the beef industry over the last couple
years have presented the entire beef supply chain with enormous
challenges. The resulting price movements have been frustrating for
cattle producers, to say the least. Yet, these same price movements and
supply chain disruptions have also contributed to the accelerated
investment in packing capacity expansion, new technologies, and new
business strategies that will help the beef industry adapt and evolve
to ever changing demands. That's the market at work.
Beef Production is a Balancing Act
Before advancing the conversation, it's important to note the
difference between cattle and beef. In a simple equation form, a recipe
if you will, beef can be represented as the output from the combined
inputs of cattle, human labor, physical capital (e.g., facilities), and
technology.
Beef = Cattle + Labor + Physical Capital + Technology
The inputs of this equation are always seeking, but never finding,
the perfect balance between one another. Input imbalances are
communicated through prices, whether that's cattle prices, wages, or
investment/divestment in physical capital and technology. As expected
in commodity markets, whether it's natural gas or cattle, the over-
expansion/over-contraction and subsequent price signals responding to
imbalances generate cycles (e.g., the cattle cycle). If any two inputs
in the beef production equation are unbalanced, either the limiting
input has to expand or the surplus input has to contract. For example,
packing capacity (facilities, labor, technology) expands, or cattle
numbers decline. Often, it's cattle numbers that are the most
responsive to imbalance. Between the two possibilities, the decision to
retain or sell a few head comes much easier for the multitude of cow-
calf producers than the high-risk, capital-intensive, regulatory-
complex endeavor of packing capacity expansion.
Historical Perspective
Beef packing has historically been a low margin business (see
Figure 1). Precise estimates of individual company performance are
extremely challenging with publicly available, industry average data,
but estimates can get close and identify trends. Based on the estimates
shown in Figure 1, beef packers averaged an annual loss of USD 11 per
head from 2002 to 2014. In the year 2000, with a total cattle
population of 98.2 million head, the U.S. harvested 29.6 million head
of fed cattle (see Figure 2). By 2014 and 2015, the total cattle
population was below 90 million head with 2015 fed cattle slaughter at
only at 22.7 million head. Throughout this period of largely drought
induced beef cow herd contraction, the most inefficient packing plants
were driven out of business as competition for limited cattle supplies
drove cattle prices to record highs. From 2000 to 2015, the U.S. beef
industry experienced a net decline of roughly 14,000 head per day in
fed cattle processing capacity. Today's maximum U.S. fed cattle
processing capacity (no absenteeism, no equipment breakdowns, flawless
logistics, etc.) is estimated at just above 100,000 head per day.
The remaining plants are those that have best managed operating
costs through optimal geographic location, supply chain relationships
(both suppliers and customers), and economies-of-scale. However, as
cattle herd expansion has outpaced packing capacity and shifted the
balance of the beef production equation, packers have been
strategically positioned to capture record margins in recent years.
This shift was well in place in the years prior to the pandemic. The
Tyson-Holcomb fire and [COVID]-19 only magnified the shift by creating
acute and unexpected massive imbalances between cattle numbers and
suddenly limited availability of labor and/or facilities. As of mid-
June 2021, beef packers are still struggling to utilize more than 90-
92% of daily capacity as a result of labor shortages and additional
[COVID]-19 precautions, even in the face of ample cattle supplies.
Figure 1. Estimated annual beef packer operating income per head and
estimated annual average monthly excess fed slaughter capacity,
2002-2020
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Note: Operating income = (cutout value + by-product value) ^
(cattle purchase cost + estimated processing cost). Estimated
monthly capacity is the maximum federally-inspected steer and
heifer slaughter for a given month over the previous 3 years,
except for 2020, during which [COVID]-19 related impacts and
cattle backlogs were considered.
Source: USDA NASS, USDA AMS, LMIC, Rabobank 2021.
Figure 2. Annual Fed Cattle Slaughter and Total Cattle Inventory, 2000-
2020
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA NASS, LMIC, Rabobank 2021.
The Relationship Between Cattle and Beef Prices
Packers are margin operators. Thus, operating costs influence the
spread between cattle and beef prices, as packers attempt to capture
some profit above operating costs. As operating costs increase, packers
will attempt to pass some of those costs to their suppliers or
customers, depending on who has the most leverage in the negotiation.
This is no different than cattle feeders adjusting their feeder cattle
bids based on feed prices and expected fed cattle prices.
The relationship between fed cattle prices and beef prices is also
driven by the relative balance between fed cattle supply and
operational fed cattle processing capacity (the capacity actually
achievable given labor conditions, equipment function, weather, and
logistics). The greater the fed cattle supply in relation to processing
capacity, the greater the spread between cattle prices and beef prices.
In such a scenario, packers don't have to compete as aggressively to
buy cattle, and cattle feeders are more willing sellers because packers
can more easily find cattle elsewhere to meet their needs.
Throughout the pandemic, packers simply haven't had the operational
ability to harvest all of the cattle ready to be marketed. While record
strong beef demand in both domestic and international markets and, at
times, a limited beef supply have driven up beef prices, the bottleneck
in packing capabilities has prevented that demand from being
transmitted to the cattle sector. Beef cattle value is dependent on the
ability to transform cattle into beef. The impacts of both the pandemic
and the Holcomb, KS, plant fire severely constrained this
transformation. A limited resource, in this case operational packing
capacity, will be rationed to those willing to give up the most to
access and incentivize that resource. On one end of the supply chain
that means paying high prices for beef, while on the other, that means
accepting a lower price for cattle. Under such extreme circumstances,
cattle price could even be interpreted as how much cattle feeders were
willing to pay (i.e., receive a lower selling price) to get an
available harvest slot and clear their cattle backlog.
Increased beef demand, which translates to a higher price for the
same quantity of available beef, also seems to contribute to higher
packer margins. Using quarterly data from 2002 through 2019, a
structural supply and demand model was developed, representing the cow-
calf, cattle feeder, and packer segments, along with consumer beef
demand. The results indicate that a 1% increase (decrease) in wholesale
beef price (comprehensive cutout) is associated with a 0.8% increase
(decrease) in fed steer price. Upon inserting 2020's market conditions
into the model, accounting for consumer beef demand, fed cattle
supplies, and operational packing capacity, it was predicted that the
average spread between wholesale beef price and dressed fed steer price
would increase by USD 25 per cwt vs. 2019. The actual price spread in
2020 increased by USD 26 per cwt compared to 2019. This model does not
account for the increased operating costs due to [COVID]-19 impacts,
which would be expected to further increase the predicted gross margin.
Packer gross margin as percent of sales revenue has also behaved
within the realm of expectation. From 2002 to 2019, the correlation
between annual estimated packer gross margin percent and annual
estimated ratio of fed cattle supply to operational packing capacity
was +0.73 (see Figure 3).
Figure 3. Estimated U.S. beef packer gross margin as percent of sales
and estimated fed cattle supply as percent of operational
packing capacity
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA NASS, USDA AMS, LMIC, Rabobank 2021.
A simple linear regression model to predict packer gross margin
based on the ratio of fed cattle supply and operational packing
capacity using the 2002 through 2019 data was estimated. When the
resulting equation is applied to the estimated ratio of fed cattle
supply to operational capacity for 2020, the predicted packer gross
margin for 2020 is 27% (see Figure 4). The calculated packer gross
margin based on USDA market data was 30%. Again, this analysis does not
account for the increased operating costs due to [COVID]-19 impacts,
which would be expected to further increase the predicted gross margin.
Figure 4. Predicted 2020 U.S. beef packer gross margin as percent of
sales
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA NASS, USDA AMS, LMIC, Rabobank 2021.
In both of the exercises described above, it's important to note
that 2020 data was not used to train the models. Supply and demand
relationships present in the beef industry prior to 2020 were used to
estimate price relationships in 2020 with very respectable accuracy.
This provides evidence that the same market relationships that were in
play when packers were losing money in the early 2010s were also at
play during 2020. Based on the conditions of the market in 2020, the
spread between beef and cattle price has responded well within the
bounds of expectation in both direction and magnitude.
Meeting Consumer Demand
All beef industry value originates with consumers. Over many
decades, centuries perhaps, consumers have increasingly demanded high
volumes of high quality, consistently supplied, safe, and affordable
food. The food supply chain, from retailers and distributors all the
way to producers, has evolved to meet these demands through improved
quality, safety, and production efficiencies. The beef supply chain is
no exception.
There is a small, but growing segment of consumers who place a high
priority on sourcing food directly from primary producers or attach
significant value to other specific food attributes. The market is
naturally evolving to meet these preferences. However, for the vast
majority of consumers, price, taste, and safety are still the most
important factors.
The use of economies-of-scale to increase production efficiency and
reduce production costs motivated the mid- to late-20th century
investment in larger packing plants and consolidation into larger meat
packing companies. It also stands to reason that larger beef packing
companies can better serve large customers, such as retailers and
distributors, who have also grown in size in recent decades. It is
worth noting that beef industry concentration has not changed
meaningfully in the past 25 years, while beef and cattle prices have
fluctuated dramatically based on market fundamentals.
Cattle feeders and packers have turned to contractual agreements,
defined as alternative marketing agreements (AMAs), to reduce marketing
costs, supply chain risks, and increase capacity utilization, which
reduces per head operating costs for both packers and cattle feeders.
The inventory management offered by AMAs also helps improve the
consistency of beef delivered to consumers by allowing fed cattle to be
marketed in a more dependable and timely manner.
Furthermore, AMAs offer convenient implementation of value-based,
post-harvest marketing, which directly incentivizes and helps improve
beef quality. Over the past 15 years, the share of beef grading Choice
or Prime has increased from 55 percent to more than 80 percent.
Improved beef quality and consistency grow consumer beef demand.
Mandates Have Costs and Major Risks
If the government mandated a certain percentage of negotiated spot
(cash) transactions between cattle feeders and packers, there is an
exceptionally high likelihood that cow-calf producers would receive a
lower price for their cattle. Cow-calf producers would bear the
greatest burden of the negative impacts because they are primary
suppliers rather than margin operators (i.e., there's no other market
participant further upstream to pass the burden to).
Government intervention into how cattle are marketed does not
change the market fundamentals described above and thus will not
improve cattle prices. Price discovery in some form or fashion is
necessary in any market. It is possible that increased negotiated cash
transactions could improve price discovery, but improved price
discovery does not mean a better price. Price discovery means that we
get closer to the ``true'', fundamentally driven market price. That
``true'' price could be better or could be worse. We have no way of
knowing exactly what that ``true'' price is. We can only estimate it
based on market dynamics of supply and demand, such as those described
above. And based on those dynamics, recent beef to cattle price spreads
have been well within the range of expectations.
In this context, a comparison of 2014 and 2020 is noteworthy. In
2014, weekly cash transactions averaged 22.9 percent of all fed cattle
transactions. In 2020, that measure was nearly identical at 22.5
percent. The annual average live fed steer price was USD 154 per cwt
and USD 108 per cwt for 2014 and 2020, respectively. The difference was
fed cattle supply relative to operational packing capacity. In 2014,
estimated market-ready fed cattle represented only 89% of operational
capacity. In 2020, estimated market-ready fed cattle represented 120%
of operational capacity.
It has been suggested that mandating increased cash trade will
bring more bids to the open market, increasing competition and
increasing cattle prices. If all else stays equal, increased bids would
be expected to increase price. But it is almost certain that all else
will not stay equal. For both cattle feeders and packers, AMAs reduce
marketing costs and reduce supply chain risks, while increasing
capacity utilization, which reduces per head operating costs for both
packers and cattle feeders. Increasing cash trade would do the
opposite. As packer operating costs increase, they will decrease the
price they pay for fed cattle. Again, this is no different than cattle
feeders reducing their bids for feeder cattle when corn price
increases. All told, it is very possible that the net effect of
mandating increased cash trade could decrease cattle price while also
increasing marketing costs and inventory risks for cattle feeders.
Because cattle feeders are also margin operators, increased costs,
increased risks, and lower fed cattle prices would ultimately result in
cattle feeders paying less for feeder cattle and calves.
All of the above points are supported by an immense body of
economic research literature, as well as my own personal research. The
most comprehensive research to-date on the topic of fed cattle
transaction type and potential market power is the ``GIPSA Livestock
and Meat Marketing Study--Volume 3: Fed Cattle and Beef Industries
Final Report'' (RTI, 2007), which was commissioned by the USDA,
authored by 16 economists from public institutions and nonprofit
organizations, and peer-reviewed by multiple anonymous reviewers. Both
market participant interviews and quantitative analysis conducted as
part of RTI (2007) support the conclusions stated above. While the
cattle and beef industry have continued to evolve since 2007, to my
knowledge there is no published research that contradicts the full
production system impacts that were estimated in RTI (2007).
Keeping the Future in Mind
There is always opportunity to learn, adapt, and improve
industries. However, it is important that today's ``solutions'' do not
inhibit tomorrow's progress. Allowing markets the flexibility to adjust
to a changing world and consumer is imperative.
Price discovery is necessary for any market, but the source of
price discovery can change. While the negotiated spot market currently
serves as the primary base price reference for fed cattle formula
transactions, other species, swine in particular, have shown that
wholesale meat prices (pork cutout value) and futures prices can also
serve as reference prices. In some cases, base price for hog formulas
is calculated as a combination of negotiated spot, pork cutout, and/or
futures price. If cattle producers truly want cattle prices to more
closely reflect consumer demand, it may make sense to price cattle
based on transactions that occur closer to the consumer (e.g., meat
prices) rather than farther away (e.g., negotiated cash). It's
important to note that all reference prices have advantages and
disadvantages.
AMAs will play a critical role in the market of the future.
Consumer, investor, and government demand has positioned sustainability
as a major and growing focus across all of agriculture. Marketing beef
in grocery stores and restaurants based on sustainable cattle and beef
production practices has already begun. Given the sustainability goals
of major beef and food companies, beef brands centered around
sustainability will continue to grow. Verifying and tracing sustainable
production practices throughout the entire beef supply chain and
guaranteeing a supply of cattle that meet sustainability standards for
a particular brand require information sharing and supply coordination
between market participants. As already discussed, one of the best ways
to coordinate supply chains and incentivize demanded traits is the use
of AMAs or other contractual agreements.
The Opportunity for Packing Capacity Expansion
Even before the extremes of 2020, recent margins suggest that there
is opportunity to add packing capacity. However, that opportunity does
not come without significant risk. Escalating drought conditions
coupled with a currently contracting cow herd foretell of cyclically
tighter cattle supplies over the next few years.
Several considerable hurdles must be addressed by both incumbents
and new entrants to achieve success regarding new capacity. First, the
up-front cost of a new or expanded plant is extremely expensive. Based
on recent new plant announcements and the current environment of high
construction costs, a new plant currently costs roughly USD 200m for
every 1,000 head of daily capacity. Putting together and allocating
that kind of capital is not a simple exercise, particularly for a
potential newcomer.
Second, it's challenging to compete with the established supply
chain networks, markets, and efficiencies of existing plants, even if a
new plant were opened by one of the large incumbent packing companies.
Not only have major packers achieved economy of scale, but most all
have also achieved economy of scope. Packers are increasingly involved
in value-added processing that targets specific customers, such as
case-ready retail cuts or ground beef products. Most existing plants
already proved their competitiveness and fitness for survival when the
last cattle cycle forced less-efficient plants out of business in the
early and mid-2010s. It's not just about building a facility, it's
about building a business model.
Third, the packing sector has been facing labor challenges for
years. Building a skilled and dependable work force in what may likely
be a region that already has a packing plant presence will be a
formidable task.
Finally, the capital depth and longevity required to build and
maintain a new plant through its first cattle cycle precludes most
would-be investors from considering such a project. If a packing plant
project is initiated at peak cattle numbers when packing margins look
favorable, it's likely that the cattle cycle would turn over in the
multiple years required to build the plant, meet regulatory
requirements, and start harvesting and that the new plant would have to
operate with tight cattle supplies and negative profit for its first
few years of business. That's not a recipe for thin capital or weak
hearts.
Beef Packing Plant Gross Margin Outlook
Figure 5 and Figure 6 apply a model that includes the fed supply to
operational packing capacity ratio, percent of weekly slaughter on
Saturday (which accounts for the strain being put on employees and
facilities), U.S. domestic beef demand, and U.S. export beef demand to
predict beef packer gross margin as percent of sales. Both figures
assume a 5,000 head per day expansion in total industry operational
packing capacity by 2023. The key difference is beef cow inventory.
With the Jan[.] 1, 2021 beef cow inventory at 31.2 million, Figure
5 assumes that beef cow inventory bottoms at 30.5 million head in 2023.
Figure 6 assumes that beef cow inventory bottoms at 30 million head in
2023. Figure 5 forecasts gross margin to return to levels similar to
2016 and 2017. However, the gross margin forecast for 2023 in Figure 6
is 2.5 percentage points below the same year in Figure 5 and
dangerously close to the unprofitable early 2010s.
Predicting the future is hard. The point of this exercise is to
illustrate that if the beef cow inventory only declines moderately,
5,000 head per day of new packing capacity should have relatively
favorable conditions to initiate operations. If the beef cow inventory
declines sharply, the first few years of new capacity could be
incredibly challenging from a profitability perspective.
Figure 5. Forecast of U.S. beef packing gross margin percent assuming
total industry operational packing capacity expands by 5,000
head per day by 2023 and U.S. beef cow inventory declines to
30.5 million head in 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Note: Shaded area represents two times the 2010 to 2020 RMSE.
DD = U.S. beef domestic demand index, EXD = U.S. beef export
demand index.
Source: USDA NASS, USDA AMS, LMIC, Rabobank 2021.
Figure 6. Forecast of U.S. beef packing gross margin percent assuming
total industry operational packing capacity expands by 5,000
head per day by 2023 and U.S. beef cow inventory declines to 30
million head in 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Note: Shaded area represents two times the 2010 to 2020 RMSE.
DD = U.S. beef domestic demand index, EXD = U.S. beef export
demand index.
Source: USDA NASS, USDA AMS, LMIC, Rabobank 2021.
Industry Response
(1) New construction and expansion
In response to the economic signals being sent from the imbalance
of cattle supplies and operational packing capacity, numerous plans for
greenfield plants or expansions of existing facilities have been
unveiled in recent months. These plans come from new entrants, minor
incumbents, and major incumbents alike. If all of the announced plans
for plant construction and expansion come to fruition, 8,000 to 9,000
head of daily fed cattle capacity and more than 2,000 head of daily
non-fed capacity could be added to the U.S. beef industry over the next
5 years.
Most all of the greenfield construction or new entrant plans are
small to medium sized (500 to 1,500 head/day capacity), supply chain
coordinated, and focused on product differentiation premiums. If these
smaller plants are going to compete with the efficiency, economic
scale, and scope of the large incumbents, they will have to be
successful in these supply chain relationships and product
differentiation. Differentiated beef requires differentiated cattle.
The best way to secure a consistent supply of such program cattle is
through alternative marketing agreements. Not only are cattle supply
relationships critical, but strong relationships with buyers (for every
piece, not just the high-value cuts) are critical. Again, entering the
meat packing space is not just about building a facility, it's about
building a business model.
Current consumer and investor trends suggest that moving forward
there's real opportunity for beef companies with traceable, well-
informed, coordinated supply chains that can verify production
practices and differentiate product on more than just eating quality.
Thriving export markets and growing export opportunities also point to
ever growing demand for U.S. beef. Many of the current plans to build
new capacity are a long way from realization with many of the
previously described challenges yet to be tackled.
Local lockers and `micro-plants' have a place in direct-to-consumer
marketing and can play an important role in rural communities, however
they simply don't offer enough scale to make a measurable, industry-
wide impact in the balance of cattle numbers and packing capacity. That
said, with the proper business model, they can offer great
opportunities for some operations.
(2) Technology
Additional operational capacity does not have to come solely from
new facilities. Whether in new or existing plants, increased technology
implementation will be a critical component of future success.
Recently, many packers have revitalized their focus on technology
development as a means to address labor challenges, manage processing
costs, and reduce product waste. Enlightened by the pandemic to the
long standing labor shortages in the meat industry, many startups are
also bringing outside expertise and perspectives to advance technology
in the meat supply chain.
Maintaining necessary skilled labor has long been a challenge for
packers. [COVID]-19 has magnified labor challenges and revealed the
necessity of additional employee safety measures. Although hazard
bonuses, additional sick leave, and other costs most directly
associated with the pandemic will diminish with time, many additional
labor costs associated with employee well-being, including base wages,
benefits, and in-plant safety measures will persist into the future.
As the packing plants of the future gradually become more
automated, efficiency will improve and throughput volatility will
decrease. Operating hours may also become less restrictive,
particularly if technology allows for a smaller Saturday workforce.
While increased automation in carcass breakdown and fabrication is
certainly a long-term goal, improved production-line data collection
and machine monitoring have the most near-term promise. Increased real-
time production-line monitoring will help identify choke points and
inefficiencies while preventing breakdowns and the introduction of
foreign material. Estimating current industry daily fed slaughter
capacity at roughly 100,000 head, even a one percent improvement in
efficiency across all existing plants could add 1,000 head daily fed
cattle capacity. The final result will be an inherent increase in
operational capacity at existing plants. However, these changes will
take time.
A Note of Caution
As already described, current market fundamentals suggest that for
those willing to take the capital risk and do the work to build a
viable, competitive business, today may offer the best opportunity in
decades to expand packing capacity. Yet, there is a point where
industry capacity expansion goes too far to withstand cyclical periods
of tight cattle supplies. Support for new packing capacity that is
given too freely, without enough private risk, and with disregard to
long-term market fundamentals, may invite over-expansion, putting all
market participants in jeopardy, particularly new entrants.
Cattle Producer Risk Management
Supply chain disruptions presented challenges for all producers,
and risk management goals and outcomes vary depending on the individual
producer and the strategy implemented. That said, a general conclusion
is that risk management strategies performed as expected, or perhaps
even better than expected considering the record positive basis during
the periods of the most extreme market uncertainty and price declines,
and effectively protected prices for those producers who had risk
management plans in place.
CME Group offers both futures and options contracts for Live Cattle
and Feeder Cattle. While continuous monitoring for potential
improvements and changes is necessary, Live Cattle futures and options
contracts in their current form are used extensively as risk management
tools.
Using Feeder Cattle futures and options can be more challenging.
Compared to Live Cattle, Feeder Cattle futures basis has more seasonal
and regional variability resulting from seasonal and regional
variability in supply of and demand for feeder cattle. For some
contracts, the often strong seasonal price appreciation from initial
trading to expiration precludes some producers from using feeder cattle
futures as a risk management tool. There is also consistently lower
volume in Feeder Cattle futures trade. Combined, these factors can
limit the use of Feeder Cattle futures.
Livestock Risk Protection (LRP) offers a viable alternative to
using commodity futures for risk management, particularly for calves
and feeder cattle. Whereas commodity futures contracts have a fixed
contract size, LRP's head count flexibility is an attractive feature.
With major changes to LRP in recent years, including expanded head
count limits, increased premium subsidies, and allowing premium
payments to be made at the end of the coverage period, even producers
who considered, but decided against implementing the product in the
past may find the new specifications more accommodating. LRP can be a
reasonable option to protect producer revenue in the case of a general
market decline and may be particularly attractive to small to mid-sized
producers or producers who are less familiar with or do not care for
the attributes of commodity futures.
Forward contracts often utilize futures contracts as well. In many,
or probably most cases, forward contracts establish basis at contract
initiation and allow producers to lock-in a selling price based on the
futures contract that is nearest, but not before the agreed upon cattle
delivery period.
In general, risk management tools, used individually or in
combination, can be used to achieve two different goals: to either
``lock-in'' a price or price window, or protect a producer from a price
move in the undesired direction (price decrease if a seller, price
increase if a buyer). It is important to note that risk management does
not guarantee profitability, but it can decrease uncertainty and help
prevent catastrophe. While each risk management tool offers unique
advantages and disadvantages, many cattle producers have effectively
employed the currently available suite of risk management tools. Such
risk management tools encompass not only cattle prices, but feedstuffs,
such as corn futures and USDA's Pasture, Rangeland, Forage (PRF)
insurance program.
Producer Education
Producer education is key to cattle and beef industry success, and
university extension programs have a critical role to play. Evaluating
current extension programs, practices, and funding for opportunities to
revitalize producer outreach, improve effectiveness, and better fit
communication strategies with 21st century technologies is necessary
and would be an extremely worthwhile endeavor. The wide array of
responsibilities faced by beef producers, particularly small and
medium-sized owner-operators, often means that financial assessment,
business strategy, and risk management take a backseat to immediate
animal husbandry demands. Cow-calf producers in particular would
benefit from risk management education efforts. The importance of
consistent, thorough, and applicable producer education, particularly
surrounding business management and risk management, cannot be
overstated.
Price Spreads Will Narrow
The biology and natural time-delays of the beef industry make it
slow moving and capital intensive. Adjustments take years. Total U.S.
cattle numbers peaked in 2019 at 94.8 million head and will likely
contract for another couple years. If not for the pandemic disruptions,
cattle supplies and packing capacity would already be much better
aligned. In such a ``No-[COVID]'' scenario, current packer gross margin
percent would likely be closer to 2018 levels, 18%, rather than today's
30%.
With any luck we will work through the long tail of 2020's cattle
backlog in Q3 2021. Year-over-year cattle prices are already improving
and should continue to do so through 2H 2021 and beyond. In conjunction
with tightening cattle supplies, capacity expansion will come online
over the next several years and new technologies will reduce labor
constraints, further shifting margins to the benefit of cattle
producers.
Markets At Work
The shocks to the beef industry over the last couple years have
presented the entire beef supply chain with enormous challenges. The
resulting price movements have been frustrating for cattle producers,
to say the least. Yet, these same price movements and supply chain
disruptions have also contributed to the accelerated investment in
packing capacity expansion, new technologies, and new business
strategies that will help the beef industry adapt and evolve to ever
changing demands. That's the market at work.
The Chairman. Well, thank you very much, Dr. Aherin, and
basically what you are saying is what has always proven true,
and that is necessity is the mother of invention, and that in
terms of the changes that have occurred in the food supply
chain, the necessity of the combination of factors that we have
outlined this morning have resulted in innovation and changes
within the beef cattle market industry.
All good testimony, folks, and now, we will get to the
opportunity for Members to ask questions in your allotted time.
I conferred with the Ranking Member here. It is the chair's
wish, if we can make it work, and we will try to make it work,
that when votes are called we will continue to go, and people
go and come back. We have three votes, supposedly.
The list that I have here among Members who wish to speak
and ask questions on the Democratic side: Axne, Rush, Craig,
Hayes, and Spanberger. On the Republican side: DesJarlais,
Kelly, Bacon, Baird, Mann, Feenstra, Moore, Hartzler, Rouzer,
and possibly LaMalfa, who is participating. That is the list I
have in the order it has been given to me.
So, with that said, let me begin my questions.
Dr. Lusk, as you know, we have had in the West drought-
stricken challenges that we have been faced with. Ranchers and
farmers, dairymen and -women have been impacted by these
droughts. Eighty-five percent of the respondents rated selling
out portions of their herd or flocks as prevalent or higher in
their area. Can you talk about how the extreme drought has
impacted, along with wildfires in the western United States,
including California that we are experiencing right now, and
how it might impact the beef supply chain and cattle markets?
Dr. Lusk. Sure. I think for those folks that are
experiencing drought, it is an extraordinarily difficult
position, and it is one of the factors that leads to these
cycles that I think I alluded to, also Dustin, I believe
alluded to as well, that some of that liquidation that is
happening now is going to have repercussions 3 or 4 years from
now.
Unfortunately in some cases bad news for people in the West
is good news for people in other parts of the country, because
it will eventually lead to some higher prices as there are
fewer supplies in the market. Fewer cattle on the market will
support future prices.
I think it is a very difficult time. It does suggest, to
me, to protect against weather-related risks and price-related
risk, and I think there are a number of tools available to
producers to help protect, at least somewhat, against those
adverse situations. I think it also speaks to the need to
understand some of the impacts of climate change on the
industry, and think about research and technology science that
can be used to help producers adapt to and be more resilient in
the face of some of these changing weather conditions.
The Chairman. Thank you.
Members, I initiated a letter that many of you signed to
Secretary Vilsack that urged the USDA to take a stronger role
in helping food and agriculture industry bolster their
cybersecurity and better respond to cyberattacks.
[The letter referred to is located on p. 61.]
The Chairman. Dr. van de Ligt, I would like you to comment.
In your testimony, you referenced an alphabet soup of
government agencies and some tied to cybersecurity. Can you
comment on how the interagency is working together or should be
working together? Too often I think we operate in silos that
really aren't helpful to ensure that our Federal Government as
a whole, as well as the industry, are better prepared to fight
cyberattacks as a whole. And I would like your comments on the
recent efforts that we have experienced on the payoffs of
ransomware, and whether or not that should be encouraged or
discouraged, and your thoughts on that. Dr. van de Ligt?
Dr. van de Ligt. Great, thank you. A couple questions
there.
Within the food sector, the alphabet soup of agencies,
USDA, FDA, DHS, FBI, they all play a role. Part of that is
because of the way that food is----
The Chairman. Are they talking to each other?
Dr. van de Ligt. I am. Can you hear me?
The Chairman. No, no, I said are these alphabet of agencies
talking to each other? I know you are talking to us.
Dr. van de Ligt. I am sorry. They do. They do, Chairman
Costa. So, there is a food and agriculture critical
infrastructure government coordinating and sector coordinating
council, and so, there is communication at that level. They do
talk, but there are still some inefficiencies in that. One of
the reasons that we recommended that USDA take the lead,
particularly with cybersecurity, is because they have more
influence across the broader set of agriculture, particularly
pre-harvest. But it is really important that they continue this
collaboration and this communication.
DHS and FBI are two interesting ones that come in. DHS,
from a national security perspective, as you alluded earlier,
food supply is actually a national security issue, and so, they
bring a different influence and a different view to the table.
FBI, particularly in the cybercrime arena, is really important.
But we also can't forget our private-sector partners,
because they are the ones that are going to be doing much of
the work. And so, this collaboration and this communication
through--and I think we can begin it and continue to implement
it through the GCC and SEC--but we should also take into
account the Congressional actions that have already taken
place. So, for example, the Food Safety and Modernization Act
(Pub. L. 111-353) actually has an infrastructure--a legal
infrastructure in order to--that could be leveraged to move
cyber defense forward in the food industry under the auspices
of how it impacts food safety and things like traceability.
The other----
The Chairman. Well, we'd like your recommendations, and my
time has expiring here, I apologize, but your view on
ransomware?
Dr. van de Ligt. That is where I was going, on ransomware.
Ransomware is really the nemesis right now, and as
publicity increases and more people are paying off ransomware
attackers, it becomes more lucrative for them to be able to do
that. And that, particularly, is true in the realm of
cryptocurrencies.
So, I think we will see a rise in ransomware; however, we
are also finding that there is a way to pull back. I think like
in the case of JBS, through our FBI and our Federal partners,
they were able to pull back some of that payment. So, that
offsets it. But publicity and money, it drives a lot of
evildoers in the society, and so, I do think we can continue to
see it--cyberattacks continue to perpetrate themselves.
The Chairman. Well, my time has expired, but, this is
something I want to pursue further in terms of the appropriate
role in which we can protect the private-sector, because I
think this is going to continue until, whether it is through
the NSA or FBI or other means of the Federal Government to
provide this protection, because of the factors that are
involved.
My friend, the Ranking Member, it is your opportunity to
ask questions or make comments.
Mr. Johnson. Thank you, sir.
Dr. Aherin, I will start with you. I thought your addendum
to your testimony was very interesting insofar as it showed how
high packer margin had been in the last 3 or 4 years, and then
how modest it was in maybe the 10 or 15 years prior to that.
We have heard some discussion today about an extra 5,000
head of capacity likely coming online. What would be--maybe in
just 1 minute--what would be the impact on packer margin if
that new capacity does show up?
Dr. Aherin. So, all else equal, expanding packing capacity
would likely reduce packer margins, because it is going to
increase competition for cattle, which will drive up cattle
prices. And I think it is important to remember that packers
are margin operators, so the money that they make is the
difference between beef price and cattle price, and the cost
that they incur to turn those cattle into beef.
Mr. Johnson. And we have seen futures trend up. Is the
market baking in some of these assumptions about capacity
expansion?
Dr. Aherin. In terms of futures, I think the primary
driver, at least in current contracts, is tightening cattle
supplies. We largely worked through the one million head
backlog that was created in the second quarter of 2020 when all
those plants were shut down or slowed down, and we are going
through extreme drought situations in much of the country. The
cow herd is in a contractionary phase. So, a lot of these
plants that are being built, if they are successful, won't come
online for a number of years. So, I think the most immediate
price moves are due largely to cattle supplies.
Mr. Johnson. Yes, excellent point about the short-term
versus the long-term.
So, I mean, I would be interested in getting the take on
this next question from Dr. Aherin, Dr. Lusk, Dr. Jacobs if we
have time.
Dr. Lusk, I was struck by your point. I will put some words
in your mouth, but basically that just expanding capacity maybe
in a dumb way might create another set of bankruptcies or
acquisitions on the capacity side. I think we do--to the extent
that we do anything, I think we do want it done in a smart way
and in a way that will create some abiding and some sustainable
benefits.
So, Drs. Aherin, Lusk, Jacobs, how do we try to make sure
that these policy interventions are done in a helpful, long-
term beneficial way?
Dr. Lusk. I think from my perspective, the best case for
expanding capacity is really the one related to the resiliency
issue. In my view, resiliency is not necessarily related to the
size or the location.
The problem we had during the pandemic was just there
wasn't enough space for those cattle to go, and the problem was
there was no individual packer's capacity to have excess
capacity that they are not currently utilizing. I don't think
there are really any easy answers to that problem, but you
know, if you want excess capacity to exist in the system,
somebody has got to pay for it at the end of the day.
Dr. Aherin. From my perspective----
Mr. Johnson. Not to put words in your mouth, but I think
the whole point of your testimony is that cooperative ownership
could provide a way to invest in a way that you would think
would be more sustainable and abiding. Is that right?
Dr. Jacobs. Yes, that is right, and I think there are a lot
of benefits to a supply chain from cooperation and producers
have the ultimate incentives to ensure the sustainability, the
security of their supply chains. Their livelihoods depend on
it.
I do want to say, though, however that the margins have to
be there. A cooperative model is not a fix to a market to a
business model that is not profitable, part of the supply chain
is not profitable. So, that has to be there and that is why I
was suggesting that there needs to be investment to help
understand what the minimum efficient scale is so that there
can be margins that--producer ownership and processing, and
help in scaling up to that.
Mr. Johnson. Thank you.
Dr. Aherin, the last minute is yours.
Dr. Aherin. So, one thing I think we really need to focus
on is, it is not just about facilities. We have to be able to
meet consumer demands in a cost-effective manner, and simply
trying to replicate commodity cattle processing facilities,
beef processing facilities for some of these smaller
initiatives really is probably not destined for success. So, I
think really investing in research and market research and
business model development, understanding consumers and how do
we get the cattle that we need to meet that product
differentiation. I think that is where a lot of the focus needs
to be.
Mr. Johnson. Thank you, and Mr. Chairman, I yield back.
The Chairman. I thank the gentleman, and the next Member to
be recognized is Congressmember Craig from Minnesota.
Congressmember, are you on there? I see you.
Ms. Craig. Yes, Mr. Chairman. Thank you so much, Chairman
Costa, and thank you to Ranking Member Johnson as well for
calling this hearing to focus on the beef supply chain and the
overall security of our food supply chain.
Given the consolidation in the beef packing and meat
processing industry and the events of this past year, including
the COVID-19 pandemic and the increasingly common cyberattacks
targeting U.S. industries, today's conversation is especially
relevant.
Thank you also to those who have testified today. I
appreciate the input you shared with us, and I am especially
grateful for your work to tackle these incredible challenges we
have before us.
During the most recent meeting of my bipartisan Farmer
Advisory Council, the issue of processing capacity and supply
chain stability came up over and over. Producers in my district
have struggled to get their product to market due to the
facility closures during the pandemic, and other unexpected
events like the JBS attack. Unfortunately, we don't know when
the next cyberattack or black swan event is coming, and farmers
and ranchers in my district need these supply chain issues
addressed immediately.
With that perspective in mind, I want to ask a question
both to Dr. Aherin and a question to Dr. van de Ligt.
First, Dr. Aherin, thank you for your testimony and your
mention of how additional processing capacity can come from new
facilities and also from expansion and increased investment in
existing facilities. Can you talk a little more about the
challenges that existing facilities face when seeking to expand
their operations, and what steps could be helpful in addressing
those challenges?
Dr. Aherin. Certainly. One of the biggest challenges facing
existing operations is labor and meeting the labor needs. A
facility doesn't do any good if we don't have the labor or the
technology to put product through that facility. I think one
area that really deserves a lot of attention is technology and
automation, and trying to work smarter, not harder in terms of
getting beef product through these facilities and relieving
some of these labor challenges.
So, a key point I want to make is that when I talk about
processing capacity, I am really focusing on operational
capacity. So, not the physical size of the facility, but what
is our throughput? And you can increase throughput in a number
of ways, and one of those ways is more efficient production
through technology.
Ms. Craig. Incredibly important, thank you.
I now want to turn to Dr. van de Ligt. Thank you for your
leadership on food systems security at the University of
Minnesota. Your testimony on the current state of cyber
resilience in the food supply chain makes it incredibly clear
that we have a long way to go in ensuring immunity from
sophisticated attacks on operating technology systems. Your
recommendations are incredibly helpful.
I am wondering if you can expand a little bit on what
companies are doing in light of the JBS cyberattack to improve
their cybersecurity systems. What can Congress do to ensure
those efforts are thorough and successful?
Dr. van de Ligt. Thank you, Congresswoman Craig.
So, the private-sector obviously takes these risks very,
very seriously. Anytime that they are down with a cyberattack,
they are losing money. So, there is an economic incentive to
prepare. What is difficult is that many of our private-sector
partners don't really embrace or fully understand the
difference between informational technology, so email, data
records payroll, things like that versus their operational
technology. So, one of the things that can be done is working
with this collaborative partnership of government agencies to
really take some of the cybersecurity best practices that are
prevalent in other critical infrastructures and adapting them
so that they are fluent across both the informational and the
operational technologies within--that are specific in the food
and ag infrastructure.
And then the other thing is Congress could encourage
regulatory agencies to take full advantage of the Food Safety
Modernization Act to use the strength of that law to create an
equal playing field and a requirement that cybersecurity be an
essential component in their food safety plans. Because these
cyberattacks, they don't just have the opportunity to cause a
company to cease business, they also have the capability of
putting unsafe food in the market.
So, the regulatory and the legal structure already exists,
it is just encouragement to take advantage of that.
Ms. Craig. Thank you so much, Dr. van de Ligt, and I think
with that, my time has expired and I will yield back.
The Chairman. We thank the gentlewoman from Minnesota, and
the next Member in order is Mr. DesJarlais from Tennessee.
Mr. DesJarlais, it appears that you are at your office. You
have 5 minutes.
Mr. DesJarlais. Thank you, Chairman Costa. I appreciate
that.
Tennessee is a large producer of cattle. It ranks about
12th in the nation, and cattle and calf receipts rank number
two in the state for total farm cash receipts, so this is an
important issue for us, as it is in many states. We are blessed
to have the largest Farm Bureau in the nation in my district in
Columbia, Tennessee, so we are so glad you are all here today
to help us sort through these tough issues.
Dr. Aherin, Tennessee farmers want to know that they are
receiving a fair price for their cattle. How can Congress help
increase transparency into this cattle market, while also
ensuring that today's solutions do not inhibit tomorrow's
progress?
Dr. Aherin. So, from a transparency perspective, I think we
need to recognize that mandatory price reporting really does a
lot already. I think there are certainly some places where we
can investigate expanding some of that price reporting as we
reauthorize LMR, moving forward. I think a couple of areas
could be reporting some base prices on formula transactions. I
also think it is worth noting that in a lot of ways, the
formula pricing bucket is kind of a catch-all, and it has
become a very large portion of transactions at the fed cattle
level. So, there may be some opportunity to just aggregate that
a little bit without getting into too many confidentiality
challenges.
Mr. DesJarlais. Okay, following up to that, what are the
positives for farmers and----
Dr. Aherin. Another area that I think is worth exploring is
price reporting----
Mr. DesJarlais. Okay, I am sorry. What are the positives
for farmers and feedlots to entering various contracts like
formula grid future with the packers rather than just selling
cattle through negotiated trade?
Dr. Aherin. So, alternative marketing agreements, which are
agreements that occur outside of the calf spot cash market,
they really help to minimize supply chain risks, reduce
marketing costs, increase capacity utilization both at the
feedlot level and the packer level. So, really, what this does
is it reduces operational costs and operational risks, which,
in turn, filters down to being able to pay higher prices for
cattle as it goes back to the cow-calf sector.
Mr. DesJarlais. Okay. Thank you, Doctor.
My last question is for Dr. Lusk. Labor recruitment
retention is a chief concern shared by meat producers of all
sizes. How do labor shortages at meat plants impact cattle
producers, and in your view, can Congress do anything to aid in
workforce recruitment and retention efforts?
Dr. Lusk. I agree with what Dr. Aherin said earlier, that
what you really want to focus on is effective capacity. Even if
you have the buildings, you need the labor there, and so, in a
way, labor acts as a constraint on capacity.
Visa issues, there is a lot of foreign labor that is
employed in these plants, thinking about immigration and visa
policies that increase that availability, and then, of course,
thinking about opportunities for domestic workers too, whether
it is workforce training or what have you, I think are
important.
And then the other piece of this is investments and
research related automation to make these plants less reliant
on laborers. So, I think a combination of those are three
things that you could think about, immigration issues, training
issues for domestic workers, and then investments in research
and automation.
Mr. DesJarlais. Okay. I said that was my last question, but
in the here and now, have you noticed a difference from state
to state on labor shortages where states like Tennessee that
drop the unemployment bonus, the $300 per week unemployment
bonus, have you seen an increase in uptake in production in
those state that have done that?
Dr. Lusk. Sure. I mean, this is a matter of debate among
some economists a lot of impact that extra unemployment
benefits and payments have been associated with the COVID
recovery Acts have done to our labor force.
My view is it probably has some effect. It has had some
effect on people's willingness to engage in the labor force.
What we do see is in food processing, we have seen some pretty
significant increases in wages as well, so it is an attempt by
packers to try to pull up, pull labor in, but that is fighting
against people's other incentives to do different things. So, I
think it is a difficult balance there.
I am not personally aware of big regional or geographic
differences in there, although I am sure they probably exist.
Mr. DesJarlais. All right. Thank you, Dr. Lusk, and
Chairman Costa, I yield back.
The Chairman. I thank the gentleman for yielding back, and
the chair will now recognize the gentlewoman from Iowa, a very
significant beef state in this country, Congresswoman Axne.
Congresswoman Axne, are you there?
Mrs. Axne. I am here, Mr. Chairman. Thank you. Can you hear
me?
The Chairman. Please, go ahead.
Mrs. Axne. Okay. Thank you, Mr. Chairman, for holding this
important hearing certainly, and the witnesses here for sharing
your testimony with us on the Committee.
We all know that over the last year and a half, the COVID-
19 pandemic exacerbated our supply chain issues with the beef
industry, and our producers faced bottlenecks, and processing
price fluctuations, and increased uncertainty. These issues
aren't new, and as a result, producers in Iowa are definitely
feeling the harmful effects.
I have heard time and time again from my constituents
something needs to change, so just this month, I was with
Secretary Vilsack touring a couple of operations in southwest
Iowa for the Secretary's announcement to expand processing
capacity. And we heard directly from producers who told us they
recently literally had to sell their cattle at a loss only for
the packer to turn around and make a higher profit on it.
I know these stories aren't unique. We have all heard of
them, and I am sure many of my colleagues on both sides of the
aisle would attest that we need to change that. Obviously, this
isn't right. It is not sustainable, and it is something that we
need to change. I am so glad that Secretary Vilsack is putting
funds from the American Rescue Plan towards this issue to help
us expand more processing capacity and increase competition in
the industry.
We need more regional processing, more price discovery, and
more competition so our family farmers in Iowa can be
profitable and stay in operation.
So, Dr. Jacobs, first off, always great to see an Iowan.
Thank you for being here before the Committee and joining us
today.
I am particularly interested in the ideas in your testimony
to support producer ownership of processing facilities. You
gave a couple of examples of smaller scale operations that are
producer-owned but noted that there really aren't any large-
scale facilities that are owned by the producers.
So, my first question is you offered a few reasons as to
why this might be the case, such as economies-of-scale and
suggested that USDA reaches minimum efficient scale for
processing. Can you elaborate a bit here as to what such a
study might look like, and what you think they might find?
Dr. Jacobs. Thank you for that question, and I can
elaborate on what a study might look like, and I think it is
important to understand that, I want to clarify as part of my
testimony that I wasn't trying to suggest that producer
ownership may reach the same capacity as some of the very large
processors we have right now, or maybe that it is even
necessary. But they do need to reach a capacity--that allows
for some profitability in those margins.
And I think what is important to note here is that when you
have producer ownership in the downstream markets, for example,
producer ownership of the packers--the processing, excuse me.
The example you gave where the livestock producer lost money on
the sale of cattle to the processor only for the processor to
have a very large margin, all of those then, that value would
be aggregated back at the producer. So, that does help solve
that--partially mitigate that challenge.
I think a study needs to understand--and I know we see a
number of plants that have announced coming onboard potentially
at 500 head per day. Anecdotally, I think that is the number I
have heard, and I am not prepared to testify about the
economics of that because I am not an expert in livestock
economics. But I think something to understand where, on
average, margins can be profitable at the processing level.
They don't necessarily have to be on the same level of margins
of the very large-scale processors. But something to understand
that is needed. And I think we have the data to do that, and
we, through surveys of existing processing and producers and
the data we have, I think we can do that.
Mrs. Axne. Just out of curiosity, how long do you think a
study like this would take?
Dr. Jacobs. How many economists are on it? Sorry, that was
flippant.
A couple months? I am not really sure.
Mrs. Axne. Okay. I just want, for curiosity because as we
get moving on this, I want to see what kind of timelines we are
looking at. I appreciate that.
The other thing I wanted to see if you could expand on in
your testimony is how these producer-owned facilities would be
more resilient and could navigate some of these supply chain
problems that we have talked about today?
Dr. Jacobs. I think the resiliency really comes through the
coordination that happens between the producers and the part of
the supply chain they own. So, when you have communication
between the producers and the company that they own, you get
more information exchange. You get more pricing exchange. It
allows producers to be closer to the consumer and closer to the
wholesale and the retail markets, in that case. And so, while
we don't have examples, we can't say for sure, for example,
that the experience of a producer-owned or a cooperative and
processing would have been any different in the face of COVID
or some of the other shocks that we have had, we do see
examples where cooperatives have exemplified more resiliency.
One example of that, for example, is Land O'Lakes during
COVID didn't dump a single gallon of milk. Now, their situation
is different and the shocks to their supply chain were
different than what would be facing livestock processing, but I
think because the communication, because of that, that
intricate tie between the producers and the processing that
could exist, you are going to get more creative solutions, in
my opinion.
Mrs. Axne. Well, I appreciate that, and as somebody who
spent time talking with the CEO of Land O'Lakes and knows a
little bit about how they operate, I couldn't agree with you
more. I think their internal operations helped them create the
resiliency that they needed.
So, thank you so much. I appreciate that, and I yield back.
The Chairman. We thank the gentlewoman. Her time has
expired, and the chair will now recognize the gentleman from
Mississippi, Mr. Kelly.
Mr. Kelly. Thank you, Chairman Costa, and thank each of you
witnesses for being here and this important testimony.
Dr. Lusk, you mentioned immigration. Specifically, what
policies or work policies can we implement in that arena to
make it better?
Dr. Lusk. I can't claim to be an expert on those issues;
but, from my understanding, numbers of H-2A visas, these sorts
of things, the types of workers that would be most likely to
work in these processing plants would be a place that I would
start looking. But, there are probably people more qualified
than me to answer that specific question.
Mr. Kelly. Okay, but to make it easier for renewals and to
make sure that we can get those folks in here when we need them
and to make it easier for them to get here and work, that
definitely helps, whether that is electronically or just easing
up on the process for green cards?
Dr. Lusk. Indeed.
Mr. Kelly. Okay. Second for you, what effects did you see
in the market as a result of the JBS attacks and have they been
resolved, and if so, how quickly did that occur?
Dr. Lusk. The impacts of the JBS attack were sort of--they
were a bit confounded with the holiday event, on the holiday
weekend. Many packers will actually process fewer cattle on
holidays to begin with, and this happened to occur at the same
time that probably they would have reduced processing fewer
cattle in the first place.
So, it appears that the market impacts of that were fairly
short-lived, and Professor van de Ligt can talk about this more
than me. My understanding is that JBS had some backup systems
so they were able to get back up and running, and there are
things I think individual producers can do to make sure that
when these things happen, that their effects are, indeed,
short-lived, and that seems to be what happened in this
particular case, fortunately.
Mr. Kelly. Okay.
Dr. Aherin, I have a question. As you know, U.S. cattle
herd cycles through periods of expansion and contraction over
the course of several years. During peaks and herd expansion,
cattle prices tend to be lower because of the higher
availability of supply. Conversely, during the troughs of
contraction, cattle prices increase as more packers compete for
tighter cattle supplies.
I am proud that we have our great big meat packers, but I
also believe in the diversity in having more smaller sources.
So, with that in mind, what tools do small beef packers and
processors need to remain solvent and successful during the
contractions, when they are competing with larger firms for
finishing cattle?
Dr. Aherin. I think, number one, they need to be able to
identify consumer demand opportunities that they can
differentiate their product from, just commodity product. I
also think they need to be able to coordinate their supply
chains, both with cattle producers and within product beef
consumers. So, being able to make sure they can supply the
cattle that they need for their operations is critical.
Mr. Kelly. And then finally, Dr. van de Ligt, for you,
these cyberattacks are going to continue until we either make
the cost high enough for the people that are conducting them,
or either we harden ourselves such that it becomes so difficult
that it is no longer profitable.
With that in mind, what can USDA or we in Congress do that
would make it easier for us to defend a cyberattack, especially
some of our smaller places, smaller farms or smaller producers
that just don't have the basic tools and knowledge in order to
prevent a cyberattack or make it difficult?
Dr. van de Ligt. Thanks.
So, as an academic, I am going to say education, right? So,
most of the cyberattacks, there is a human element to it. There
is a lot that we can do to harden systems, but it is that human
machine interface that often presents the openings for these
cyberattacks to occur.
So, education not only for all of our owners and operators,
but also education in--for specific cybersecurity professionals
that really understand the operational environment into these
facilities I think what will truly be critical. And to me, USDA
can--USDA and DHS can play a role in that by making really
clear--adapting those cybersecurity plans that other critical
infrastructures use to make it really super easy and understood
to our food and agriculture partners.
But it is really--it is an education process.
Mr. Kelly. Well, I want to thank all four of you witnesses.
I have no doubt with great minds like yours advising this
Committee and our nation, that we will work through all the
problems that we have. Thank you very much for your time today,
and I yield back, Mr. Chairman.
The Chairman. All right. The gentleman yields back his
time. We thank him for his questions.
The chair will now recognize the gentleman from Illinois,
Congressman Rush, as our next Member, and then followed by
Congressmember Bacon.
Congressman Rush?
Mr. Rush. Thank you, Mr. Chairman, for this very exciting
hearing.
My question is directed to Dr. van de Ligt.
Dr. van de Ligt, I want to thank you for your excellent
testimony today regarding cyberattacks. This is an issue that I
am extremely concerned about. I am the Chairman of the Energy
and Commerce Committee's Subcommittee on Energy and Power, and
I have championed solutions to cyberattacks in the energy
sector.
I believe that this multi-sector problem will also benefit
from a broader solution and end the threat to our food supply
chain issues. It's really, really troubling to me. In
particular, I am concerned about ransom payments, which you
succinctly stated that attacks will continue [inaudible]
cryptocurrency, which, of course, is hard if not impossible for
law enforcement to track.
In your excellent testimony, Madam van de Ligt, should the
government prevent companies from paying a ransom? Why or why
not? And, second, same [inaudible] currencies using
cryptocurrency? Why and why not also?
Dr. van de Ligt. Thank you for the questions.
It is tough to say that there is a one policy fits all
here. If you think about the attack on JBS, they had encrypted
backups and they were able to rebuild their systems, and could
potentially have done so even without the ransomware payment.
But they were concerned about data that could have been stolen
that they wanted to be able to recover.
But in the most recent Kaseya attack, there are still many
in the industry, not just food and ag sector, but also
affecting some academic institutions, where their data is now
completely locked because they don't have an encryption key to
recover that. And so, you are going to lose multiple years of
research effort and initiative.
So, I think if we go down the path of a policy to say we
can't pay ransomware, that is going to be a difficult one to
navigate.
And then cryptocurrency is also interesting. My personal
view is I think cryptocurrency is here to stay; but, having our
Federal authorities, our digital authorities that are working
actively, NSA, FBI, those guys, a better understanding of how
and monitoring that space and monitoring that electronic space
is going to be really critical, and they proved their
essentiality by being able to pull back some of the JBS
cryptocurrency money.
So, I think it is going to be a really tough area to
navigate, and we should certainly do it in a collaborative
public-private fashion.
Mr. Rush. Thank you.
Switching gears, Dr. Lusk, how do we--I am sorry. Dr.
Jacobs, I am sorry. Dr. Jacobs, I want to thank you for your
fascinating testimony on the importance of cooperatives. What
is the average size of a producer-owned agricultural
cooperative, and while I understand that cooperative membership
cannot discriminate on the factors of race and other factors,
do you know whether African American producers are
proportionately represented in the cooperative sector? Are
there any barriers that would prevent them from choosing to
join a cooperative, and if so, what do we need to do in order
to lower those barriers?
Dr. Jacobs. Thank you for that question. You asked some
insightful ones, and I will say my familiarity in working with
agricultural cooperatives is primarily dominated by my
experience in the Midwest. I do know that cooperatives exist,
and in fact, some of the early historical cooperatives did
have--were owned by African Americans in the Southeast, and so,
while we don't see--in my work, I don't see representation,
that representation does reflect what we see of the
demographics of farmers.
It is important to note that cooperatives are voluntary
organizations, so voluntary and open membership, and you are
right. They do not, should not discriminate on the basis of
race or age or on religious preferences or along those lines.
So, there are opportunities, and what I would encourage states
to do is look at their cooperative statutes and make sure that
they are appropriately structured, such that there are no
barriers to participation by any race.
Mr. Rush. Thank you.
Mr. Chairman, I think that concludes my time. I want to
yield back.
The Chairman. I thank the gentleman from Illinois. He
yields back, and the next Member in order is Congressmember
Bacon.
Mr. Bacon. Thank you, sir.
The Chairman. Thank you.
Mr. Bacon. Thank you, Mr. Chairman, and thank you to all
our experts testifying today.
This is a very important subject for Nebraska. We are the
number one beef export state in the country, and it is vitally
important to our economy.
My first question is to Dr. Aherin and Dr. Lusk. The USDA
recently announced the availability of $500 million in
assistance to help increase and diversify U.S. processing
capacity. Do you anticipate they will need to be highly
specialized to succeed, and if so, how important might
alternative marketing arrangements, specialized formula
purchase agreements be to this success? Thank you.
Dr. Aherin. I will share my thoughts.
Mr. Bacon. Go ahead.
Dr. Aherin. So yes, I do believe these new ventures, if
they are going to succeed, will need to be specialized and in
terms of AMAs, alternative marketing agreements, I think they
are the best way to ensure that these new plants can get the
specialized type of cattle in a consistent manner in order to
meet the demands of the brand that they are trying to build.
Mr. Bacon. Thank you. Any other input?
Dr. Aherin. One point I would make--and we talked a lot
about producer ownership and cooperatives, and I just want to
provide an example that has proven very successful in the beef
industry, and currently it is not in the form of a cooperative.
I will use names. It is all public information. But U.S.
Premium Beef is a company that is producer-owned, and it is a
minority but significant shareholder in National Beef, the
fourth largest packer in the U.S., and previously to that, they
were majority shareholders in that packing company. So, just an
example of how producer ownership has been successful in some
cases.
Mr. Bacon. I think that is a great example of an
alternative marketing arrangement.
Are there other examples like that? Thank you.
Dr. Aherin. On that scale, certainly not that I am aware
of, but no. Producer ownership in some plants has been
definitely attempted in the past, and a lot of the roadblocks
that those types of ventures run into is not clearly
identifying how they are going to sell every pound of beef that
they have. Not just the consumable product, but rendering, the
hides, offal. So, there is really a lot that needs to be done
on the back-end of the plant, as much as with cattle coming in
to ensure that any business is going to be successful.
Mr. Bacon. My next question is for anybody on the entire
panel. When I was first elected in 2017, the 115th Congress, I
made the foot-and-mouth vaccine disease bank a top priority to
get funded. I think this year we are in the final year of
getting an IOC and operational. Could you just talk about maybe
the importance of protecting our cattle market, our processors,
and this whole industry from foot-and-mouth disease, and the
importance of having this vaccine bank? Thank you. I will just
open it up to anyone who would like to speak up.
Dr. Lusk. I think we can look at the impacts of some of
those animal disease events, whether it is foot-and-mouth
disease or even before that, the mad cow incidents that have
extraordinarily negative impacts on the industry.
One of the ways that happens is through losing export
markets. That is another answer to how some of these new plants
could differentiate themselves is by specializing in products
that are demanded by certain foreign customers.
When you think about risk mitigation, investments in
vaccines and understanding the impacts of new emerging diseases
I think is critically important in ensuring the health of the
industry.
Mr. Bacon. Well, Mr. Chairman and to the Ranking Member, I
guess this is a success. I think the Committee in getting this
foot-and-mouth disease vaccine bank stood up. I think we are
hitting the final year of it becoming an IOC, and it is
something we can feel proud of that we led in this Committee.
Thank you. I yield back.
The Chairman. Thank you, and vaccines work, as we all know.
We were just commenting on--any of us who grew up in
agriculture and cattle dairy industry understands the concepts
of vaccines and herd immunity and everything else, so that is
just, as my father used to say, common sense. But then he would
pause and say I am not sure why they call it common sense. It
doesn't seem to be that common.
Our next questioner, I think we have--oh, Members, votes
have been called and so, it is the chair and the Ranking
Member's intention to continue this hearing. So, I believe
there are three votes and we will just alternate them, and for
everybody's understanding, the list that I have here in front
of me is on the Republican side: Baird, Mann, Feenstra, Moore,
and Rouzer. On the Democratic side: Hayes and Spanberger. Hayes
has her camera off, I am told, and Spanberger is voting, so I
will defer to Mr. Baird.
Mr. Baird, you are next. You are up to bat.
Mr. Baird. Thank you, sir. We appreciate it, Mr. Chairman,
and appreciate the opportunity with the Ranking Member Johnson
and being able to participate in this very important issue of
cattle marketing. I really appreciate the expertise that we
have in the witnesses before us today.
Dr. Lusk, I am going to probably start with you. We
appreciate all the work that you and your team do back at
Purdue. That is my alma mater, and you provide tremendous
information to farmers and ranchers, as well as many, many
entities within the food supply chain. And you give them the
information to make better and more informed decisions.
But I am going to start, in your testimony, you describe
how a small number of cattle that are sold on the cash basis
influence the price of a much larger number of formula price
cattle, and how this may not allow the formula price market to
truly reflect these market fundamentals. So, I think I am a
little reluctant since the data and some of the decisions we
are talking about are based on 2 very volatile years, the fire
at Holcomb, Kansas, as well as the pandemic year. So, I would
appreciate--and we know that the cattle cycle in order from the
time you decide to breed a cow until that finished steer makes
it to market can be 2 or 3 years.
So, how do we--how do you think we can do price discovery,
improve the prices for the producers, and yet not lose some of
the economies-of-scale that we have in the current slaughter
capacity? So, that is my question. I would appreciate your
thoughts.
Dr. Lusk. Yes. So, first thanks for your excellent
representation in Indiana, Representative Baird, and we are
proud to have you as an alumni at Purdue University.
I think there are a variety of ways to think about
improving price discovery. I think there is some debate about
how many transactions one actually needs for good price
discovery, and it is not necessarily clear we are at a point
where there are too few, but there are certainly some people
who would argue that we need more.
A couple of ideas have been floated to improve more, to
increase the amount of information that is in the market. There
are some proposals for a market maker program, essentially a
mix of assessments and sort of subsidies, incentives for people
to trade in a cash market. There emerged some electronic
trading markets, for example, the fed cattle exchange is one
that has the ability to bring more transactions in a very
transparent way to the market. There have been some proposals
floated for a mandate. I think I have made my view clear that I
think that is probably fairly costly, but there could be ways
to make such mandates less costly through things like a cap-
and-trade type of program.
Mr. Baird. So, I also noticed that you encouraged maybe one
of the things we could do would be to improve consumer demand,
as well as producer productivity, and look for those
efficiencies. Do you care to elaborate on that any more?
Dr. Lusk. Sure. One of the great things about working at a
land-grant university is I get to see all the fantastic work my
colleagues are doing at the university. So, when I look at my
colleagues in the Animal Science Department or the Vet Med
Department, they are working all kinds of interesting things
like putting wearables on dairy cattle to monitor their
movements and using artificial intelligence to get early
warning detection of disease. Some of my colleagues are working
on biosensors to detect bovine respiratory disease early and an
affordable way to do that. Studying heat stress, how you can
reduce that heat stress in animals and animal health issues so
that we can reduce reliance on antibiotic issues. And we have a
big research program here at Purdue focused on improving animal
welfare issues.
So, I think there are a lot of really interesting things
going on, and some of that is aimed at improving sustainability
of the beef supply chain, but hopefully providing a higher
quality product to consumers as well.
Mr. Baird. Thank you. I appreciate that very much. Anyone
else care to comment on that, the production efficiency and so
on, and maintaining the capacity?
Dr. Aherin. Congressman, I will add a couple thoughts, and
this is more along the lines of price discovery.
I think we have seen in other species that we don't always
have to discover price solely at the livestock level. There are
examples, particularly in swine, where they use meat prices to
help determine the price of hogs that are on formula. So, I
think any mandate that would dictate that we have to price a
certain number of cattle off of a cattle cash transaction
certainly hinders the ability to adapt to maybe some new
opportunities to price cattle off of beef itself sometime down
the road.
Mr. Baird. Thank you very much.
Dr. van de Ligt. This is----I was going to say, this is Dr.
van de Ligt. I just want to play on Dr. Lusk's comment.
All those technologies that he mentioned in his response to
the question about improving efficiency, the biosensors and
such, those are all operational technology issues that now
takes that cyber concern that I have at the packer level all
the way down now to the producer level.
Mr. Baird. Thank you very much, witnesses, and I see my
time is up, so with that, I yield back, Madam Chair.
Ms. Spanberger [presiding.] Thank you very much, and to our
witnesses, I am filling in for Chairman Costa while he goes to
vote.
I will now recognize myself for 5 minutes.
I am excited to be here today to talk about an issue that
matters deeply, not just to the many cattle producers across my
district, Virginia's 7th District, but to all of us across the
country that have come to rely on affordable, high-quality and
readily accessible U.S. beef. Across my district, I have heard
about how disruptions to our supply chain brought on by the
COVID-19 pandemic have threatened the livelihood of livestock
producers over the last year. And unfortunately, volatility and
uncertainty in the beef and cattle markets are not new.
Continued consolidation within the meat packing and processing
industry have resulted in long-term reductions in processing
capacity and increased risk from an unexpected and unplanned
disruptions.
This is why I was proud to work with my colleague,
Representative Dusty Johnson, to introduce the Butcher Block
Act (H.R. 4140), which would establish a loan program at USDA
for new and expanding meat processors, as well as a grant
program to help increase hiring and processing capacity at
these plants. I have been excited to see USDA take steps with
funding provided through the American Rescue Plan to help
increase competition for meat and poultry processing, and I
believe the Butcher Block Act would help expand these efforts
and ensure their longevity.
So, Dr. Lusk, I would like to begin with a question for
you. Can you explain or speak to how having increased diversity
in the supply chain, such as more small- or medium-sized
plants, could help reduce the likelihood that a black swan
event will have such a large impact on cattle and beef prices?
Dr. Lusk. Well, the hope is that if some future pandemic
comes along and it affects the workforce of a plant, that if
one goes down there is enough heterogeneity, diversity in the
system that the aggregate supply side effects are fairly
minimal.
I think the challenge, the tradeoff that exists there is
this issue of economies-of-scale that has been mentioned that
to really produce beef at an affordable price, you really need
to be large--achieve some high level of volume is one of the
reasons we see the kinds of large-scale packing that we have in
the sector. And as a result, if you look at the number of
cattle, say, processed by a fairly small plant, it is a fairly
small share of the overall story.
I think there is value in having some of that heterogeny
and diversity in the system. I think the question is really at
what cost? We will have to assist them. Can they stay in
business and compete?
I think one issue that I see is related to the cyberattack
issue. In some ways, I think the larger plants are more
vulnerable to cyberattacks because they are a bigger, more
lucrative target to seek out. So, in some sense having some
smaller and more diversified plants could help in the sense
they may be less visible to people seeking to disrupt our food
supply chain through that mechanism.
Ms. Spanberger. Thank you very much, and thank you for that
comment related to potential vulnerabilities to cyberattack.
In your opinion, are the recent investments by USDA and by
small- and medium-sized processors enough to mitigate the
current issues that we are seeing in cattle and beef markets,
and do you believe that Congress should take any additional
steps, or do you have any suggestions that you would want us to
be highlighting related to supply chain resiliency?
Dr. Lusk. I mean, I think we are already in a process where
we are realigning processing capacity with cattle numbers. So,
my fear, to be honest, is that we wake up 3 years from now and
have a bunch of processors that can't affordably operate.
Adding more capacity will, in the short run I think help
support cattle prices, but I think what we have to hedge
against is, not now, but 4 or 5 years from now when we get
those numbers realigned is to make sure you keep an eye out for
what is happening, and are we going to see a series of
bankruptcies or reductions in plant sizes. I think that is my
concern with the additions of capacity we are seeing at the
moment.
Ms. Spanberger. Thank you very much for that.
And, Dr. Aherin, would you care to comment on that question
or add anything to the answer?
Dr. Aherin. Certainly. In a lot of ways, I would echo what
Dr. Lusk mentioned. I have put in my testimony that I think
there is opportunity for about 5,000 head of operational
capacity, and again, I am going to highlight that, meaning it
not only could come from physical facilities, but could come
from improved efficiencies and throughput and better being able
to staff these facilities.
I also want to highlight that that 5,000 number that I have
put out is very contingent on the depth of the contraction in
the cow herd, and the deeper this contraction goes, the smaller
that number of profitable expansion is going to get. And so,
again, I will reiterate something I have said all along. I
think it is more important to invest in research and education
and understanding the business environment than it is in
specifically in facilities themselves.
Ms. Spanberger. Okay. Thank you very much for that feedback
and for your answer.
My time has expired and I will now recognize the
gentlewoman from Connecticut for 5 minutes.
Mrs. Hayes. Thank you so much, Madam Chair.
Connecticut is home to ten meat processing facilities. All
are small- to medium-sized, mostly family-run facilities.
Additionally, we are home to 48 beef cattle producers,
according to the State Department of Agriculture.
When talking about beef supply chains and processing,
facilities like these are often left out of the conversation.
While Congress has appropriated millions to the Coronavirus
Food Assistance Program to help producers, including beef
cattle producers, only 8.1 percent of Connecticut farmers were
eligible. This is a negligible amount, even when compared to
other small northeastern states.
These farms and processing facilities also were affected by
adverse conditions of the past year. Our producers also had to
adapt to the sudden lack of demand from commercial,
institutional, and restaurant purchasing. They also had to
address the labor concerns caused by COVID, and they also had
to adapt to the dropping demand in U.S. export meat. So, my
questions will focus on those small- to medium-sized plants
that I just mentioned.
Dr. Jacobs, during the pandemic we saw an increase in
consumer demand for beef directly from the producer or small,
local butchers. Are there signs that this opportunity will
remain as Americans return to more normal economic activities,
and what technical assistance, workforce development, and other
capacity-building is required of small- to medium-sized
producers to ensure they can meet food safety standards,
consumer preferences, and stay competitive?
Dr. Jacobs. Thank you for that question.
First of all, I think support for that system needs to
recognize that that type of small- and medium-scale processing
allows the producer to be closer to consumers, and although I
don't have the data and can't comment on that, your question
about whether or not we have seen consumers return to their
pre-pandemic purchasing, the food away from home versus food at
home and where they are getting their beef, my suspicion is
that we are going to have many consumers will remain purchasing
their animal products directly from farmers or small
processors. I think part of that will stick. How much of it, I
can't comment on that and I would be happy to look into that
further to see what has remained.
But you mentioned what other ways can we support this, and
I want to comment too about and introduce this idea of the
USDA's efforts to provide funding and capacity. I think what is
important here is to do the things that you mentioned, which is
instead of necessarily offsetting capacity costs, work on the
things that are also costs to the input and beef processing,
such as labor development challenges. Also, challenges related
to meeting regulations and the differential impacts that may
have on small producers and small processors, relative to the
very large ones. Loan guarantees could be a very important part
of this overall package.
What I would encourage is to look at the more indirect
investments that can benefit our producers, our livestock
producers and their processors. I am glad to hear that there
are small, local processors that are doing well, and I hope
that they continue to and I might encourage those that are
family-owned to consider thinking about a model in which they
coordinate, in which they consolidate, and maybe there is an
opportunity there for joint processing capacity, shared
capacity that allows them to scale up.
Mrs. Hayes. Thank you.
You mentioned it briefly, but can you just touch upon what
are the benefits of having more local and regional processing
options where they are right next to their consumers?
Dr. Jacobs. The benefits are options for consumers. The
benefits are flexibility. When you have challenges in larger
scale processing, even though our--as I understand it, our
small- and medium-scale, we don't have enough of those to pick
up slack when we have major disruptions at some of our largest
processors. That local scale is important to the continuity of
our food supply chain locally. It is important to the local
rural economies where those farmers are living and the
processors are, and they are paying wages and they are paying
taxes. And so, I think the benefits go well beyond what we see
as profitability, profitability margins at those levels. And
that is one of the features I love about the cooperative model
is that many of those benefits stay local, and those benefits
aren't just confined to profitability-based benefits.
Mrs. Hayes. Well, my time is almost up so I won't have time
for another question, but I agree wholeheartedly with
everything you just said, and I know, at least in Connecticut
District 5, if you go to any restaurant, you go out to dinner,
you know that that beef is from Connecticut when it is, because
it is fresh and people immediately identify the name of the
producer that it can be attributed to.
Thank you so much. Madam Chair, I yield back.
Ms. Spanberger. Thank you.
The chair now recognizes the gentleman from Iowa for 5
minutes.
Mr. Feenstra. Thank you, Chairman Costa and Ranking Member
Johnson.
The consolidation of the cattle industry is one of the most
critical issues in my district. I hear about this all the time,
probably the most important issue in my district at this point.
Cattle producers in my district are angry, and they are worried
that they are getting a raw deal. They see everyone in the
supply chain making large profits while they are losing from
$100 to $150 a head. My in-laws, my friends, my constituents
are seeing their livelihood end because of this.
The processing of cattle is mostly operated by four
packers, and they control approximately 80 percent of the
market. This market share lets them control the price through
contracts, manage the amount being slaughtered through line
speeds, and decide when livestock is needed for their own
profitable benefits. The system is set up where the packers
will very rarely ever see a loss, creating massive guaranteed
profit, while rural farmers are on the hook to lose lots
[inaudible].
Congress needs to engage in this and focus on transparency
and competition and processing capacities. The cash market for
live cattle has been declining over the last decade. At the
same time, we see higher grocery prices and even higher demand.
Diminished cash market participation contributes to USDA being
unable to publish LMR reports, furthering the market's lack of
transparency.
So, this is my question. My question is for Dr. Lusk. In
2005, 52 percent of the cattle were purchased on the cash
market. In 2020, that has gone down to 23 percent. The reverse
was true as well. In 2005, 33 percent of the cattle were
purchased through formula contracts, yet in 2020, 62 percent
are on formula contracts. Knowing that the cash market price is
primarily used on the basis for formula pricing, how has the
decrease in cash-negotiated trade impacted the market and price
discovery?
Dr. Lusk. Yes, I think it is important to, again,
distinguish between when you are talking about price discovery,
about price levels and then sort of market fundamentals, and I
think the concern with the smaller share of cattle being sold
in the cash market is whether you are getting sufficient price
discovery. But even if 100 percent of cattle were being sold in
a cash market, it doesn't mean prices would have been any
higher than what we recently observed.
In regards to LMR, the things that could be done to
increase the amount of information that is being conveyed
through there, thinking about confidentiality rules, about some
of the additional details that could be provided about formula
contracts, those sorts of things to provide even more price
transparency. I think even doing that, there is not necessarily
any guarantee that is going to improve the price level, which
is a separate issue.
Mr. Feenstra. Well, I am glad you said that. Smaller farms,
you probably don't realize this, but there are 700,000 farms in
the country. Ninety percent of them are family-owned. My in-
laws are one of them, own 1,000 to 2,000 head of cattle. My
friends own 2,000, 3,000 head of cattle and they are considered
small farms.
The problem is when you have large operations, you have
30,000 or 40,000 head, it shuts out people like my in-laws and
my friends and my family because they are going through a cash
basis and not formula contracting. That is why people get a
little grumpy.
So, my other question is in regard to the many proposals
before Congress aiming to increase price transparency in the
cattle market. Cattle producers, just like any other business
owner, would like to receive higher prices for their product.
What is your assessment on requiring certain levels of
negotiated transaction to improve producers' bottom line, Dr.
Lusk?
Dr. Lusk. Sure. To be honest, I don't necessarily
anticipate that policy as improving overall price levels. I
think there could be some benefits in some of those policies
improving price discovery, but I don't necessarily think we can
expect those policies to improve the price that cattle
producers are getting paid today.
Mr. Feenstra. Well, thanks for your comments, and this is a
great concern, because we are going to lose thousands and
thousands of family farms that are doing this that are getting
bullied out, pushed out by packers and formulated contracts.
With that, I yield back. Thank you.
Ms. Spanberger. Thank you.
The chair now recognizes Mr. Mann of Kansas for 5 minutes.
Mr. Mann. Thank you, Madam Chair. Thank you, Chairman Costa
and the Ranking Member Johnson for having this important
hearing today.
This is crucial to the ag industry as we know it. I am glad
that we are doing this Subcommittee hearing. Frankly, I would
like to see this be a full Committee hearing, because I am
hard-pressed to think of any issue facing agriculture in
America today that is more important than what we are seeing in
the cattle markets, and the importance of the beef industry
specifically to American agriculture.
It is also very important to my district. I represent the
big 1st, the largest beef producing district in the country.
Our family has farmed fed cattle for 120 years. I grew up in a
small feedyard preconditioning and doctoring sick calves, so
this is near and dear to my heart personally as well. I am also
a proud K-Stater, and I am really glad to see a lot of K-
Staters here as well.
I have a lot of concerns about what we have seen over the
last 20 months. My first question would really be to both Dr.
Jacobs and Dr. Lusk. Congress and the USDA have allocated
hundreds of millions in funding toward additional slaughter
capacity to help small and medium meat and poultry processors
over the last couple of years, obviously an announcement more
recently as well.
There is currently a shortage of shackle space, but as many
of you have mentioned if the cattle industry, like any
business, is still subject to the basic economics of supply-
and-demand.
So, my question really is this. How do we ensure that
taxpayer dollars create the maximum shackle space possible? In
other words, how do we spend these dollars the most efficiently
to move the needle, so to speak?
Drs. Lusk and Jacobs, Dr. Jacobs first, and then maybe Dr.
Lusk, if you would weigh in on that, I would appreciate it.
Dr. Jacobs. Yes, thank you.
These investments, I think in my testimony, what I would
say is that I think these investments should perhaps think
about focusing more on the indirect investment. So, direct
investment in shackle space. Unless we know, for example, that
that gets these processors, these small and medium to a point
where they can be profitable on their own without the support
and without the subsidization, I would question that. And that
is why I think a study is needed to understand what are the
minimum capacity requirements to get these processors get
small- and medium-scale--in other words, what is medium-scale?
What gets them to a minimum efficient scale where they can be
profitable, apart from subsidization?
I do support the indirect investments and things like
workforce development, ensuring we have the right policies in
place. Making sure that the playing field is level in terms of
regulatory burden and regulatory requirements, but short of
that, investments in shackle space are one-time--it is a one-
time shot in the arm and I would want to make sure that that
could be sustainable beyond any investment period.
Mr. Mann. Great, thank you.
Anything to add to that or any different perspective, Dr.
Lusk?
Dr. Lusk. Yes. First, I appreciate the question to think
about using taxpayer dollars wisely and efficiently, and I
would agree with Dr. Jacobs. The things that really come to
mind is what do you do to increase the size of the pie to
improve that overall demand? So, some of it is market access
issues increase that size of the pie by having access to more
consumers in different parts of the world, or to improve
quality, improve what consumers are willing to pay. That has a
longer run benefit for the entire supply chain.
The other aspect, too, I think is innovation, productivity,
improving innovation. Some of that--we have talked about the
labor issues. That is a way to improve capacity, effective
capacity is maybe some automation there, but also just
efficiency. I think there is, again, beef cattle is in
competition with a variety of other food stuffs, and we are in
competition with producers all across the world for a place on
consumers' dinner plates. And so, we have to continue to find
ways to be more efficient, make responsible use of our natural
resources.
Mr. Mann. I agree.
My last question will be for Dr. Aherin. Your testimony
suggested that there is an exceptionally high likelihood that
cow-calf producers would receive a lower price for their cattle
if the government would mandate certain required percentages of
negotiated cash sales. Could you explain that more, and why do
you believe that to be the case?
Dr. Aherin. Certainly.
So, I think the first step is understanding the benefits
that AMAs bring to the marketplace. As I have mentioned both in
testimony and an earlier question, AMAs allow packers and
cattle feeders to both reduce their supply chain risks, better
manage inventory, better utilize their cattle feeding and
cattle processing capacity, and reduce their marketing and
procurement costs. Both of those sectors of the beef industry
are margin operators, so the price that they are willing to pay
for the upstream input into their production system is very
much determined by what their operating costs are. If we
increase operating costs at the packer level, packers are
likely to pay less for fed cattle. If we reduce the price of
fed cattle and increase the operating costs of feedlots, then
they are likely to pay less for calves and feeder cattle.
So, I readily admit that price discovery is necessary, but
we have to recognize that it does have a cost and if we
eliminate or reduce the benefits of AMAs, that also has a cost,
and with cow-calf producers being primary producers and not
margin operators, they have no one else to pass on the burden
of that cost.
Mr. Mann. Thank you all. I see my time has expired, so I
yield back. Thank you.
Ms. Spanberger. Thank you.
Before we adjourn today, I invite the Ranking Member to
share any closing comments that he may have.
Mr. Johnson. Well, I think this has been remarkable, and I
just want to focus on three things quickly. First off, there
are hopeful signs in this market. We have future prices
trending up, but even more importantly than that, longer-term
we have all kinds of macro factors that will contribute to
upward pressure on price for producers, and should exert some
downward pressure on price for consumers. And I think the
extent that we can get that done in a sustainable way, that
could be tremendously good news.
The second thing I want to point out is the reason that
this hearing has been so remarkable--and the acting chair and I
were just talking about this--there has been a tremendous
amount of bipartisanship. There is a legitimate search for
policy solutions, rather than just the two sides throwing
bumper sticker slogans at one another. There has been a real
passion. So many of these Members have real-life experience
with these issues. And then finally, there is also real
knowledge. I mean, Congress works best when Members wade into
areas that they understand and that they have taken the time to
fully comprehend.
And so, I would just close, Madam Chair, by saying this.
Not only are the signs hopeful, not only has this been a great
hearing, but to the extent that we can continue those four
major concepts of bipartisanship, search for truth, passion,
and knowledge, I think the outlook is going to be better yet
for cattle producers and for consumers, and that is awfully
good news in my mind.
Thank you, and I yield back.
Ms. Spanberger. Thank you very much, Mr. Johnson.
And at this time, votes have been called and at this time,
the Subcommittee will stand in recess, subject to the call of
the chair.
[Recess.]
The Chairman [presiding.] Well, clearly the talented group
of Members of this Subcommittee have done well without me, and
I thank them.
Are there any further questions? Have our--okay. So, shoot.
I had one more question I wanted to ask. Actually, I think I
see the witness I wanted to ask this to.
Dr. Jacobs, are you there?
Dr. Jacobs. I am.
The Chairman. Question, and I was going over this with my
colleague here from South Dakota. The landscape for over 100
years in American agriculture has seen the success in co-ops in
a whole host of regions and different areas, but it doesn't
seem to me that co-ops have really established themselves
within the beef industry, the cattle industry. I am wondering
if you have any thoughts about that, based upon your own
experience and research with co-ops, why that has not been the
case, and whether you think that is consistent or not?
Dr. Jacobs. That is a great question, and that is something
that I have spoken with colleagues about. You are right. If you
look across many of the sectors within ag, dairy, fruit, nuts,
the list goes on and on, juices. We do see farmer-owned
cooperatives playing major parts in those landscapes, grain
marketing included. And we do have a couple examples, like
Country National Beef, Grassroots Farmers Co-op in Buckeye
Valley. These aren't large-scale cooperatives, and the question
you ask is a good one. Like why don't we see producer ownership
along the supply chain--further along the supply chain in a
major way in beef? And I think the answer comes down to the
enormous capital investment it requires. That is what I come
back to, and over time, the landscape has changed such that and
there has been concentration such that producers who try to
form now are really starting a foot race much later in the
game.
And so, that is the only explanation I would have for that.
I am sure there are other reasons, but I think that
concentration happened early and for factors that I am not
prepared to talk about or an expert to talk about, but I think
it has a lot to do with the enormous capital that is required
in this industry.
The Chairman. Well, thank you. All of our time has expired,
and I think we have had an excellent panel of witnesses this
morning, and we thank you for your time and your effort. I want
to thank my--the Ranking Member, the gentleman from South
Dakota, my friend, and we are going to continue to work
together with this Subcommittee over the course of this session
and the rest of this year to make sure that our efforts are
productive and reflective of the needs of the livestock needs
throughout our country, and also dealing with issues of foreign
agriculture.
So, thank you all. I want to say that, frankly, the beef
supply chain is heavily dependent upon having an important
processing capacity to operate efficiently. We have talked
about it this morning, innovative ways to protect and adapt the
supply chain to new realities. We have talked about that. I
farm in the Fresno, California area, but I don't farm the way
my father did, nor my grandfather. I think that the innovation
that we see in American agriculture for over 245 years is a
great part of its success. There will be externalities such as
wildfires or droughts like we are facing in the West. In
California, 50 of the state's 58 counties are under drought
emergency. But disasters we know are frequent, whether they be
floods along the Mississippi River, or whether hurricanes in
the South, and clearly with climate change, these factors,
these weather factors are more constant and we have to look at
how we provide a resilient supply chain and sufficient
processing capacity to factor in.
So, there are a lot of things we got to do, we got to
consider. The Ranking Member and I have talked about ways in
which we can work smarter and strategically that will enable us
to foster a more shock-resilient supply chain, because as we
learned in this pandemic, you turn that supply chain upside
down and it has significant, significant ramifications, and
also more volatility in the marketplace. And that doesn't help
anybody, consumers who are all Americans, and our producers.
So, the chair will adjourn the Subcommittee. Under the
Rules, the record of today's hearing will remain open for 10
calendar days to receive any additional material and
supplementary written responses from witnesses to any question
posed by a Member. That is an opportunity for all Members of
the Subcommittee.
So, this hearing of the Subcommittee on Livestock and
Foreign Agriculture is adjourned, and I want to thank the staff
on the Majority and Minority side for making it a very
productive Subcommittee hearing. Thank you very much.
[Whereupon, at 12:13 p.m., the Subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Letter by Hon. Jim Costa, a Representative in Congress from
California
June 22, 2021
Hon. Thomas J. Vilsack,
Secretary,
U.S. Department of Agriculture,
Washington, D.C.
Dear Secretary Vilsack:
As you are aware, the recent cyberattack on JBS, and the potential
for future attacks like it, present a grave threat to the livestock and
poultry supply chain and the entire U.S. food system. As Members of the
U.S. House Agriculture Committee, we view this attack and its
implications for supply chain security and resiliency as a top
priority.
As you know, food security is national security. This maxim takes
on further meaning in light of the rising threat of cyberattacks on
critical U.S. industries as they fight to rebound from the impacts of
the COVID-19 pandemic. JBS is the most recent and prominent example of
a cyberattack in the food and agriculture sector, but according to
ransomware experts, at least 40 food companies have been targeted by
ransomware gangs over the last year.\1\ These types of attacks, and the
risks they pose to supply chain resiliency, are increasing and we need
a coordinated response to prevent them.
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\1\ https://www.npr.org/2021/06/03/1002819883/revil-a-notorious-
ransomware-gang-was-behind-jbs-cyberattack-the-fbi-says.
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To that end, we urge USDA to collaborate with industry, the
intelligence community, and law enforcement agencies across the Federal
Government to share intelligence on food and agriculture-specific
cyberthreats, to ensure that industry is aware of best practices for
preventing cyberattacks, and to execute a coordinated response to
attacks such as this one. Additionally, we would also like to see USDA
collaborate with the Department of Justice to recover the $11 million
paid in ransom money that JBS was coerced into paying to bring their
plants back online. Allowing perpetrators of attacks such as this one
to achieve financial gain will only encourage further attacks.
When it comes to our food system, it is vital that we do not act in
a reactionary way, but that our reactions inspire preventative measures
to protect against future attacks. We were encouraged to see that the
Department committed to spending $4 billion to address supply chain
issues, and that you are co-chairing the White House Supply Chain
Disruptions task force. It is our hope that overall cybersecurity will
be prioritized, and we would like to see additional plans that
specifically address the threat that cyberattacks pose to the livestock
industry.
We look forward to working with you on this critical issue to
ensure that America's food supply chains remain resilient and, at your
convenience, would like to discuss how USDA is pursuing these matters.
Sincerely,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Hon. Jim Costa Hon. Dusty Johnson
Member of Congress Member of Congress
Hon. Cheri Bustos Hon. Kat Cammack
Member of Congress Member of Congress
Hon. Gregorio Kilili Camacho Sablan Hon. Cynthia Axne
Member of Congress Member of Congress
Hon. J. Luis Correa Hon. Salud O. Carbajal
Member of Congress Member of Congress
Hon. Ann Kirkpatrick Hon. Bobby L. Rush
Member of Congress Member of Congress
Hon. Angie Craig Hon. Sanford D. Bishop, Jr.
Member of Congress Member of Congress
______
Submitted Letter by Hon. Jim Costa, a Representative in Congress from
California; on Behalf of Bill Bullard, Chief Executive Officer,
Ranchers Cattlemen Action Legal Fund United Stockgrowers of America (R-
CALF USA)
July 28, 2021
House Committee on Agriculture,
Subcommittee on Livestock and Foreign Agriculture,
Washington, D.C.
Dear Chairman Jim Costa, Ranking Member Dusty Johnson, and Members
of the Subcommittee:
The Ranchers Cattlemen Action Legal Fund United Stockgrowers of
America (R-CALF USA) appreciates this opportunity to present this
written statement to the U.S. House Agriculture Committee Subcommittee
on Livestock and Foreign Agriculture regarding its July 28, 2021
hearing on State of the Beef Supply Chain: Shocks, Recovery, and
Rebuilding.
R-CALF USA is the largest U.S. trade association that exclusively
represents United States cattle farmers and ranchers within the multi-
segmented beef supply chain. Its thousands of members reside in 45
states and include cow-calf operators, cattle backgrounders and
stockers, and feedlot owners. R-CALF USA also represents U.S. sheep
producers.
As depicted below in Chart 1, for \1/4\ century (1990-2015) there
was a strong synchronous relationship between monthly fed cattle prices
and monthly retail beef prices. Something--a glue of sorts--held this
strong price relationship together over this considerable period
despite the occurrence of exogenous factors such as drought, changes in
cattle inventories, changes in feed costs, changes in currency
valuations, changes in beef demand, and changes in the price of protein
substitutes.
But no more. Beginning around the first of 2015, cattle prices
inexplicably collapsed. And when the dust settled, monthly fed cattle
prices and monthly retail beef prices began moving in opposite
directions. That something--that glue of sorts--that long held the
historically strong synchronous price relationship together had been
vanquished.
Longer than 4 years after the 2015 manifest disconnect between fed
cattle prices and retail beef prices, the nation's beef supply chain
encountered its first of three major market shocks--the August 2019
temporary closure of a major beef packing plant in Holcomb, Kansas.
This event highlighted the fragility of the beef supply chain that now
lacks the glue that once held the supply chain together. The onset of
COVID-19 in early 2020 was the second major shock, and it served to
exacerbate the disastrous symptoms associated with the first shock. The
third major shock, a cyberattack impacting one of the four largest beef
packers, served to further highlight the systemic weakness of America's
beef supply chain.
Chart 1
Historical Relationship Between Cattle Prices and Retail Beef Prices
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA Economic Research Service.
Everyone should now know that that something--that glue of sorts--
that held the pricing relationship within the entire beef supply chain
together was none other than competitive market forces. And since at
least 2015, those competitive market forces have been purged from the
beef supply chain.
This is now an elephant in the room crisis that Congress must
tackle with swift and decisive action. If not, we will soon witness a
further acceleration of the already fast-shrinking domestic cattle
industry, and we will witness it in months, not years. Many cattle
producers, already suffering severely depressed cattle prices, now face
unprecedented drought conditions. The situation is critical and
America's family farm and ranch system of cattle production hangs in
the balance.
Chart 2 below illustrates the financial harm accruing to the live
cattle sector of the beef supply chain in a marketplace now void of
competition. It depicts ever rising and unprecedented weekly beef
packer margins beginning in 2015 while cattle feeders continually
struggle to achieve monthly returns that would allow them to just break
even.
Chart 2
Per Head Est. Packer Margins vs. Per Head Est. Cattle Feeding Returns
Based on 1,400 lb. Fed Steer
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Data Source: USDA Market News MPR Datamart; USDA High Plains
Cattle Feeding Simulator.
America's family farm and ranch system of cattle production cannot
be sustained if the situation described above, i.e., lack of
competitive market forces resulting in systemic losses to the live
cattle sector, is allowed to persist.
Congress has several options with which to address this acute
problem: (1) It can address the core of the problem by taking decisive
measures to reinsert competitive market forces where they have been
purged from within the beef supply chain. (2) It can build, or cause to
be built, an alternative beef processing infrastructure (e.g., new and
expanded local and regional packing plants) to compete against the
existing beef processing infrastructure. (3) It can, of course, pursue
a combination of the first two options.
R-CALF USA urges Congress to immediately pursue the first option as
it holds the greatest potential to provide both immediate and permanent
results. This is because a robustly competitive industry is inherently
more sustainable than one propped up with government subsidies, as
would be required under the second option.
Importantly, Congress must recognize a critical fact that can be
deduced from Chart 1 above. And that is that since 2015 consumers have
demonstrated their willingness to pay more than enough for retail beef
to have made everyone along the beef supply chain whole. The problem,
therefore, is a supply-chain allocation of profits problem and it is
competition itself that is best suited to correct it.
We recommend Congress implement two immediate triage measures for
which to reinsert competitive market forces along and within the beef
supply chain: (1) Force the concentrated beef packers to immediately
begin competing for the available supply of cattle by requiring them to
purchase at least half of their cattle needs in the negotiated cash
market, which is the most important price discovery market for the
entire live cattle industry. Bipartisan Senate Bill 949 sponsored by
Senators Chuck Grassley and Jon Tester is the appropriate means with
which to reinsert competition in the domestic cattle market. (2)
Empower consumers to exercise choice in the retail marketplace by
differentiating between beef produced exclusively from cattle born and
raised by U.S. cattle farmers and ranchers and beef produced in whole
or in part in foreign countries. New legislation to require all beef in
U.S. commerce to be labeled as to where the animal was born, raised,
and harvested--known as mandatory country-of-origin labeling (mCOOL),
is the appropriate means with which to reinsert competition in the
retail beef market.
Given the oligopolistic structure of the nation's beef packing
industry, the forgoing recommendations must be viewed as merely the
first step--the triage step--in restoring for consumers and cattle
producers alike a more resilient and reliable domestic beef supply
chain. The second step must address each transaction point along the
entire beef supply chain where competition has been purged.
To accomplish this, Congress should enact legislation to reverse
those non-competitive cattle procurement practices by the oligopolistic
beef packers that have now become institutionalized under the misguided
theory that efficiency trumps competition. Prohibiting packers from
contracting for cattle without establishing a firm base price at the
time of the agreement and banning packer ownership and control of
cattle for more than 7 days before slaughter are two such legislative
reversals of institutionalized cattle procurement practices that
contribute greatly to the loss of competitive market forces within the
beef supply chain.
Thank you for this opportunity to submit our written statement in
the hearing record. We would appreciate the opportunity to meet with
you and your staff for purposes of further examining America's beef
supply chain and formulating a more comprehensive plan to improve it.
Sincerely,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Bill Bullard, CEO.
______
Submitted Statements by Hon. Jim Costa, a Representative in Congress
from California *
---------------------------------------------------------------------------
* Editor's note: references annotated with () are retained in
Committee file.
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Statement 1
on behalf of julie anna potts, president and chief executive officer,
north american meat institute
On behalf of the North American Meat Institute (NAMI or the Meat
Institute) based in Washington, D.C., and its 724 members around the
country, thank you for the opportunity to submit this testimony.
The Meat Institute is the United States' oldest and largest trade
association representing packers and processors of beef, pork, lamb,
veal, turkey, and processed meat products. NAMI members include more
than 350 meat packing and processing companies, large and small, and
account for more than 95 percent of the United States' output of meat
and 70 percent of turkey production. The Meat Institute provides
legislative, regulatory, international affairs, public relations,
technical, scientific, and educational services to the meat and poultry
packing and processing industry.
On July 19, NAMI and eleven other organizations representing
livestock producers, farmers and companies who produce the vast
majority of America's meat, poultry, and dairy, as well as animal feed
and ingredients, unveiled the Protein PACT for the People, Animals, and
Climate of Tomorrow.* The Protein PACT is the first joint initiative
designed to accelerate momentum and verify progress toward global
sustainable development goals across all animal protein sectors to
ensure customers, consumers, and policy makers trust that meat aligns
with their sustainability expectations. The Protein PACT has been
submitted to the United Nations' (UN) Food Systems Summit as a
sustainability game changer, and sustainable livestock and poultry
production was featured in a side event at the Food Systems Summit
ministerial in Rome on July 27.
---------------------------------------------------------------------------
* https://www.meatinstitute.org/ht/display/ReleaseDetails/i/192863/
pid/287.
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Through the Protein PACT, Meat Institute members have developed
robust metrics for continuous improvement that sustain healthy animals,
thriving workers and communities, safe food, balanced diets, and the
environment and align with the UNs' 2030 Sustainable Development
Goals.**
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** https://sdgs.un.org/goals.
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Claims about Increasing Consolidation and Concentration are Misplaced
Let me state at the outset, the members of the Meat Institute--and
their livestock suppliers--benefit from, and depend on, a fair,
transparent, and competitive market. This testimony is offered to
provide a comprehensive picture of the dynamic, competitive market in
which cattle producers and beef packers operate.
Much of the rhetoric about concentration in the beef packing sector
wrongly implies that consolidation is on-going and that packers' market
power is becoming more and more concentrated. That is not the case. The
four-firm packer concentration ratio for fed cattle slaughter has not
changed appreciably in more than 25 years. According to the
Agricultural Marketing Service's (AMS) Packers and Stockyards Division
(P&S), the four firm concentration ratio was 82 percent in 1994; today
it is 85 percent.
The meat packing industry has been, and continues to be, one of the
most highly scrutinized industries when it comes to antitrust review.
P&S is uniquely charged, by statute, to provide on-going oversight for
fair business practices and to ensure competitive markets in the
livestock, meat, and poultry industries. Additionally, any potential
merger or acquisition regulators believe threatens ``too much market
power'' is subject to review by the Justice Department or the Federal
Trade Commission. The last proposed merger of two of the ``big four''
fed cattle slaughterers occurred in 2008--and it was blocked by the
Department of Justice.
Another clarification is needed. It is frequently claimed that the
big four packers control 85 percent of beef production in the U.S.
Again, that is not the case and a misleading exaggeration. Fed cattle
make up 79 percent of the total cattle slaughter. Cows and other non-
fed cattle, make up the balance, primarily slaughtered to be made into
hamburger. The lean meat from these animals is a necessary ingredient
to be made into America's supply of hamburger produced in combination
with the less demanded muscle cuts from the fed cattle. This
distinction is important because up to 50 percent of all beef in the
U.S. is consumed as hamburger. Even factoring in the non-fed cattle
slaughter plants they own; the four largest beef packers represent
about 70 percent of total U.S. beef production.
Critics of the industry frequently mistake individual packing plant
size with overall industry concentration. The size and location of
plants, however, reflect basic economic factors like the cattle supply
and the economics of plant operations. Indeed, the cattle supply itself
is concentrated. The farms and ranches that produce about \1/2\ of all
beef cattle in the U.S. are in just seven states. Further, more than 70
percent of all fed cattle are in just five states. Economies of scale
drive the capacity and production of a packing plant. That is
especially true in areas with large numbers of fed cattle.
Likewise, cow slaughter plants rely on a supply of cull cows from
pasture-based cow-calf farms or dairy farms and are structured based on
those factors. Each packing plant has its own cost structure. Packers
bid on cattle based on the supply and demand factors in their own
region. Owning a plant in Texas does not change the bottom-line to a
company's operation in Iowa or Colorado.
Finally, given that the structure of the beef packing industry
industry is driven by supply and demand factors, the false premise
regarding concentration providing undue market power for beef packers
must be corrected. The bottom-line is the current level of four-firm
concentration has existed for more than 25 years and it has not ensured
packer profitability at the expense of producers.
No sector--cow-calf, feedlot, nor packer--has realized positive
margins every year. For example, the four-firm ratio in 2014, when cow-
calf and feedlot margins were at record highs, was the same as in 2017
when all three sectors showed positive margins. However, over this 25
year timeline, the cow-calf sector incurred negative margins the fewest
number of years of the three as the chart below shows.
Historical Margins Per Head by Sector versus Packer 4 Firm
Concentration Ratio
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA Packers and Stockyards Division (concentration);
Sterling Marketing (margin).
The U.S. Meat Industry is Efficient and Affords Americans the Benefit
of Spending Less of their Personal Disposable Income on Food
than any other Country in the World
Notwithstanding some popular perspectives being espoused about
supply chains, particularly the meat the industry's response to
significant ``black swan'' events, including the Holcomb packing plant
fire, the recent cybersecurity attack, and the COVID-19 pandemic, the
facts support the conclusion the industry proved resilient in
extraordinary circumstances. One can argue the market worked as one
would expect and suggestions that the government needs to step in and
``do something'' may be trying to fix something that is not broken.\1\
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\1\ Economic Reasons for What was Observed in Fed Cattle and Beef
Markets During the Spring of 2020, Steve Koontz, Department of
Agricultural & Resource Economics, Colorado State University, May 28,
2020.
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Before trying to ``fix'' something it is prudent to look back and
acknowledge the benefits that flow from the system as it exists. In
2019, Americans spent an average of 9.5 percent of their disposable
personal incomes on food-divided between food at home (4.9 percent) and
food away from home (4.6 percent). Between 1960 and 1998, the share of
disposable personal income spent on total food by Americans, on
average, fell from 17.0 to 10.1 percent, driven by a declining share of
income spent on food at home.\2\ Indeed, Americans spend less of their
disposable personal income on food than any other country in the world.
This remarkable drop is attributable largely to systemic efficiencies
that allow food processors to offer food to consumers at lower prices.
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\2\ https://www.ers.usda.gov/data-products/ag-and-food-statistics-
charting-the-essentials/food-prices-and-spending/.
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COVID-19 Affected the Cattle and Beef Markets
The COVID-19 pandemic was a shock to the meat supply chain, as it
was for every industry in America. A brief review provides some
instructive context for a discussion of cattle and beef markets during
the pandemic. Meat was not the only item affected in the grocery store;
we saw similar situations in everything from toilet paper, to
disinfectants, to hand sanitizer.
Last year, pandemic-related plant interruptions temporarily idled
about 40 percent of slaughter capacity for cattle and hogs at the peak
of its impact. This disruption happened in tandem with unprecedented
retail demand for beef due to panic buying and freezer stocking as
shelter-in-place orders were put in place. The situation was worsened
by the significant operational changes needed to rebalance production,
processing, and distribution away from foodservice toward retail. The
type of cuts, product sizes, processing equipment, packaging and
distribution vary considerably between retail and foodservice and are
not easily transitioned.
The impact of the shift from foodservice to retail was substantial.
Before the pandemic, in both 2018 and 2019, foodservice accounted for
about 61 percent of all domestic beef consumption. That dropped to less
than 55 percent in 2020. Conversely, retail sales of beef increased
from 38 percent to 45 percent of overall domestic consumption.\3\
---------------------------------------------------------------------------
\3\ Nielsen, Answers on Demand, 2020 Beef Sales; NPD Category
Sizing.
---------------------------------------------------------------------------
According to the Beef Checkoff,
A major change in consumer behavior that affected the retail
industry was the ``stocking-up'' behavior experienced at the
beginning of the pandemic. Shoppers rushed to their grocery
stores to buy surplus groceries, especially meat products. Even
as late as September of last year, 50% of consumers surveyed
reported to be ``stocking-up'' at a greater rate than normal.
With this behavior, and with the foodservice industry
restricted or shutdown, 83% of consumer meals were being cooked
and consumed at home. Ground beef was one of the main products
to be stored in refrigerators and freezers, with over 50% of
consumers reporting to have surplus ground beef products.\4\
---------------------------------------------------------------------------
\4\ Beef Checkoff, Hindsight 2020: Retail and Foodservice Trends
Through the Pandemic (https://www.beefitswhatsfordinner.com/retail/
sales-data-shopper-insights/pandemic-market-trends), accessed July
2021.
This had a dramatic impact. In 2020, retail beef sales increased by
606 million pounds by volume, or more than 11 percent. All fresh meat
and poultry sales increased 19 percent by value, an increase of $9.6
billion. Beef sales increased by $5.9 billion in value, accounting for
61 percent of that overall growth in protein demand. Ground beef sales
alone grew by $2.02 billion,[1] accounting for 21 percent of
the total increased aggregate demand for meat and poultry. Beef demand
remains high: the total volume of beef sales in 2021 from January
through mid-June remained more than four percent higher than the pre-
pandemic levels over the same period in 2019. This increase in beef
demand in 2020 happened while the packing sector's ability to process
cattle was experiencing operational constraints, and has continued into
this year while labor availability has similarly affected the packing
industry's ability to operate at full capacity. Meanwhile, the supply
of fed cattle remained large. In short, COVID-19 created a significant
``kink in the chain'' that took time to straighten.
---------------------------------------------------------------------------
\[1]\ Id. at 3.
---------------------------------------------------------------------------
Early in the pandemic the National Cattlemen's Beef Association
(NCBA) commissioned the Oklahoma Cooperative Extension Service and
several distinguished agricultural economists to examine the impact
COVID-19 was having and was expected to have on the beef cattle
industry. That paper warned ``the timeline for market recovery from
COVID-19 is unknown, and cow-calf losses could expand into 2021 when
the summer and fall 2020 calf crops would be marketed.'' \5\
---------------------------------------------------------------------------
\5\ Economic Damage to the U.S. Beef Cattle Industry due to COVID-
19, OSU/NCBA, April 2020.
---------------------------------------------------------------------------
The market is rebounding. This week Feeder Cattle futures reached
contract highs for the August through March 2022 contracts. On Monday,
July 26, the Feeder Cattle contract closed at its highest since March
2016. Live Cattle futures prices so far in July have averaged higher
than the same month in 2017, 2018, and 2019, all pre-pandemic. This
reflects a smaller supply of cattle, which according to USDA's mid-year
cattle inventory report released last week, is down 1 percent from last
year. Also, it reflects the recovery in cattle processing capacity.
Fed Cattle Marketing and Price Discovery
From ranch to the slaughter plant rail, live cattle typically
change ownership two to three times. Cow-calf producers market their
cattle to feeders, or to backgrounders who in turn move those cattle to
feeders, who then market to packers. The price for cattle at any of
those three most common points of transactions is a function of how
many cattle are in each respective market segment. In other words, the
price is determined by supply of cattle to sell from one segment and
the demand for buying cattle by the next segment. That explains why
each segment can experience different margins and why there is a
futures contract for two types of cattle: feeder cattle and fed cattle.
When any of those segments are out of balance, prices move, and the
moves can be dramatic, as witnessed by the COVID-spurred retail beef
demand, which represents the final segment of the entire pasture to
plate value chain, and the COVID-imposed imbalance within various
segments of the cattle sector.
Considerable attention has been focused on packer margins hitting
historic levels during COVID, and before that, after the 2019 fire at
the beef packing plant in Holcomb, Kansas (which happened right before
Labor Day weekend, a point of high seasonal beef demand). These
dramatic and unforeseen events put the cattle supply chain temporarily
out of balance. In both cases due to a temporary loss of processing
capacity, the interrupted demand for cattle led cash market fed cattle
prices to fall, while the reduced and uncertain supply of beef led
wholesale beef prices to rise dramatically.
In his analysis of the COVID situation, Dr. Steve Koontz of
Colorado State University wrote,
To expect historical relationships between meat price and
livestock prices to persist when major facilities in the
packing sector are at times closed and in others operating at
reduced capacity has no economic foundation.\6\
---------------------------------------------------------------------------
\6\ Koontz.
Nonetheless, calls for investigations into market transparency,
collusion, and the structure of the beef packing industry were made. In
August 2019 USDA announced its intent to investigate the economic
impact to the cattle market stemming from losing beef processing
capacity after the fire at the Holcomb slaughter facility. In April
2020 that investigation was expanded to include the impact of COVID-19
to ``determine if there is any evidence of price manipulation,
collusion, restrictions of competition or other unfair practices.'' \7\
---------------------------------------------------------------------------
\7\ USDA Statement on Beef Processing Facility in Holcomb (https://
www.usda.gov/media/press-releases/2019/08/28/secretary-perdue-
statement-beef-processing-facility-holcomb-kansas), Kansas, August 28,
2019.
---------------------------------------------------------------------------
In July 2020, USDA's AMS released its Boxed Beef and Fed Cattle
Price Spread Investigation Report detailing the agency's investigation
into cattle and beef price margins, finding no wrong-doing and
confirming the disruption in the beef markets was due to devastating
and unprecedented events.
Further, per that report, AMS related ``One of the underlying
concerns about price discovery is the declining number of participants
in the negotiated cash market.'' \8\ Since then, there have been
several proposals, including legislation introduced in Congress, to
restructure and regulate the cattle market through significant
government intervention. Prominent among the proposals is to require
cattle feeders to sell cattle to packers, and packers to buy from
feeders, a mandatory minimum volume of fed cattle on a cash, spot
market basis, or ``negotiated'' basis purportedly to improve price
discovery. These proposals, however, threaten the industry with
numerous adverse, unintended consequences.
---------------------------------------------------------------------------
\8\ Boxed Beef and Fed Cattle Price Spread Investigation Report
(https://www.ams.usda.gov/sites/default/files/media/
CattleandBeefPriceMarginReport.pdf), USDA AMS, July 22, 2020.
---------------------------------------------------------------------------
There is robust price discovery in the cattle and beef markets.
Congress established and USDA administers the Livestock Mandatory
Reporting Act (LMR) program to facilitate open, transparent price
discovery and provide all market participants, both large and small,
with comparable levels of market information for slaughter cattle and
beef, as well as other species.
Under LMR, packers must report to AMS daily the prices they pay to
procure cattle, as well as other information, including slaughter data
for cattle harvested during a specified time period and with net
prices, actual weights, dressing percentages, percent of beef grading
Choice, and price ranges, and then AMS publishes the anonymized data.
AMS publishes 24 daily and 20 weekly cattle reports each week. Weekly
reports start Monday afternoon and end the next Monday morning. These
reports cover time periods, regions, and activities and the data
include actual cattle prices.
Further, packers report all original sale beef transactions in both
volume and price through the Daily Boxed Beef Report. This data is
reported twice daily, at 11:00 a.m. and at 3:00 p.m. Central Time. The
morning report covers market activity since 1:30 p.m. of the prior
business day until 9:30 a.m. of the current business day. The afternoon
report is cumulative, including all market activity in the morning plus
all additional transactions between 9:30 a.m. and 1:30 p.m., and is on
the USDA DataMart website. The boxed beef report covers both individual
beef item sales and beef cutout values and current volumes, both of
which are derived from the individual beef item sales data.
Stepping back for a moment, it is unimaginable in virtually any
other industry participants in a free market would be required to
report such data on an on-going, daily basis, and that the data would
then be published by the government for competitors and other market
participants to view, analyze, and use as a basis for strategic
decisions. And yet, despite all of the onerous, mandated reporting
requirements already in place, some people claim there is no market
transparency and there needs to be more price discovery. Where does it
end?
The proposals to implement a mandatory minimum volume of negotiated
cash sales go far beyond the purported objective of market transparency
and price discovery to regulating terms of sale in a private
transaction between producers and packers. They represent the beginning
of the Federal Government regulating more--or all--terms of sale in the
cattle market. Such behavior should be concerning to producers given
the number of transactions among the segments of the cattle production
supply chain described earlier.
Further, there have been suggestions Congress should amend the
confidentiality provisions in the Agricultural Marketing Act applicable
to LMR. One bill has been introduced that would prohibit USDA from
withholding any ``information, statistics, and documents.'' This
concept has data privacy and antitrust implications for both packers
and feeders. USDA has examined the LMR confidentiality requirements and
determined relaxing the requirements would not ensure anonymity among
the market participants. Producers are not the only market participants
using the published LMR data: packers and others constantly analyze the
data, and any loosening of the confidentiality requirements could
provide some market participants full view of their competitors'
actions in the market.
By design, a mandate for packers to meet a minimum volume of
negotiated cash sales would limit a producer's ability to use other,
preferred types of cattle procurement and marketing tools, including
forward contracts and various formula-based purchases that comprise the
majority of transactions for market-ready cattle. These pricing
methods--collectively known as alternative marketing arrangements
(AMAs)--combined with the negotiated cash market pricing, have served
U.S. cattle producers, the beef industry, and consumers well over the
past 2 decades by:
Providing producers and cattle feeders with an effective
risk management tool;
Reducing marketing costs for cattle feeders and producers;
Improving efficiency though the supply chain;
Improving the quality of U.S. beef;
Meeting U.S. consumer demand and building trust by
incentivizing not only quality, but the safety, sustainability,
and consistency of U.S. beef; and
Enhancing the competitiveness of U.S. beef in global export
markets.
Greater utilization of AMAs has coincided with a significant
improvement in beef quality. The percent of beef grading at the top two
levels, Choice and Prime, has increased from 60 percent in 2000 to 85
percent in 2020.
Negotiated Sales versus Beef Quality Grade
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: AMS.
There are economic and business reasons why cattle transactions
have evolved in the way they have. In its 2018 Report to Congress, AMS
said ``Stakeholders were in general agreement that formula-based
purchases provide greater benefits, in terms of operational efficiency,
for both packers and feedlots.'' \9\ Proponents of mandatory negotiated
cash sale volumes have not acknowledged, much less addressed,
fundamental questions such as which producers would be forced to give
up their AMAs, and what effect on beef quality and demand could result.
---------------------------------------------------------------------------
\9\ Report to Congress, Livestock Mandatory Reporting, USDA AMS,
2018.
Analysis of this impact has been done, however. The Research
Triangle Institute (RTI) conducted the definitive study about the use
of and benefits that flow to all sectors regarding AMAs.\10\ The study
was mandated and funded by Congress, published in six volumes, by 30
researchers in four teams, conducting nearly 3 years of research and
was peer reviewed. In the executive summary RTI said:
---------------------------------------------------------------------------
\10\ See United States Dept. of Agriculture. Grain Inspection,
Packers and Stockyard Administration. GIPSA Livestock and Meat
Marketing Study. Vol. 1. Research Triangle Park: RTI International,
2007.
Many meat packers and livestock producers obtain benefits
through the use of AMAs, including management of costs,
management of risk (market access and price risk), and
assurance of quality and consistency of quality.\11\
---------------------------------------------------------------------------
\11\ Id. at ES-3.
---------------------------------------------------------------------------
RTI also concluded:
In aggregate, restrictions on the use of AMAs for sale of
livestock to meat packers would have negative economic effects
on livestock producers, meat packers, and consumers.\12\
---------------------------------------------------------------------------
\12\ Id.
---------------------------------------------------------------------------
RTI also found, for cattle, that
Hypothetical reductions in AMAs, as represented by formula
arrangements (marketing agreements and forward contracts) and
packer ownership, are found to have a negative effect on
producer and consumer surplus measures. . . . Over 10 years, a
hypothetical 25% restriction in AMA volumes resulted in a
decrease in cumulative present value of surplus of
2.67% for feeder cattle producers;
1.35% for fed cattle producers;
0.86% for wholesale beef producers (packers); and
0.83% for beef consumers.
A hypothetical 100% restriction in AMA volumes resulted in a
decrease in cumulative present value surplus of
15.96% for feeder cattle producers;
7.82% for fed cattle producers;
5.24% for wholesale beef producers (packers); and
4.56% for beef consumers.\13\
---------------------------------------------------------------------------
\13\ Id. at ES-8-9.
Finally, ``price discovery'' should not be confused with price
determination, i.e., supply and demand fundamentals. Typically, when
market prices are low or falling, there are increased concerns
expressed about ``price discovery.'' There appears to be a widespread
perception that a reduction in cash trade is, by definition, bearish.
In fact, in times of market disruption, formula and contract pricing
can prevent precipitous drops and support quicker recovery. From an
economic perspective, bearish cattle prices result from ``price
determination'' factors, such as supply of cattle in each segment of
the supply chain and the capacity to process cattle into beef, but also
the overall demand for beef and other competing proteins.
Mandating more cash purchases does nothing to remedy bearish price
fundamentals. The volume of cash sales is less relevant than is the
type and quality characteristics of the cattle sold being
representative of the market. Additionally, the types of cattle
transactions vary greatly over time, even week to week. Imposing
mandatory minimum volumes creates an incentive to alter transaction
types that could result in less price discovery.
Supply and Demand Fundamentals Are at Work
Before the pandemic, the supply of cattle was growing. For the
first 3 months of 2020, the fed cattle supply experienced year-over-
year growth. For each month--January, February, and March--the number
of cattle and calves in feedlots with capacity of 1,000 or more head
was larger than it was during the same months in 2019. The supply of
fed market cattle remains high this year. USDA reports that in 2021,
the cattle-on-feed inventory has been the second highest monthly total
ever on record for 4 of the first 6 months of the year, February
through June 2021.
As expected, when supplies of cattle increase, prices decrease--and
vice versa. The chart below shows how this has played out over the past
10 years, with or without such significant ``black swan'' events as
COVID, the fire at the Holcomb packing plant in 2019, or this year's
cyber ransomware attack.
Cattle Market Supply and Demand
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA AMS.
Nonetheless, in the face of the many challenges, the beef packing
sector has proven resilient. Total beef production in 2020 was slightly
higher than 2019, based on heavier slaughter and carcass weights. As
expected, cattle weights increased during the disruptions from COVID.
Total head of commercial slaughter in 2020 was down just two percent
from 2019, despite the dramatic disruption to the cattle harvest during
the second quarter of 2020 resulting from the pandemic.
Packers adjusted to the combination of the large supply of cattle
and constraints on their capacity by increasing their Saturday
slaughter and processing operations to increase through-put. Saturday
slaughter year-to-date (through June 19, 2021) has been nearly 40
percent higher than 2020 and 50 percent higher than the more normal
year of 2019.
Saturday Cattle Slaughter
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA AMS.
Although through the first half of 2021 there remained a large
supply of fed cattle to be harvested, which affected cattle markets and
prices, through June, year-to-date cattle slaughter is nearly six
percent greater than the previous 5 year average for the same period.
The Labor Supply Affects Cattle Markets
Production in meat packing and processing plants are, in some
respects, tied to the number of employees working the line. During the
early phases of the COVID-19 pandemic, employee absenteeism, whether
due to contracting COVID-19, or being sent home with symptoms, or
quarantined because of exposure, or simply because of apprehension of
coming to work as seen in some locations, caused processing lines in
some plants to slow. Additionally, many packers were further challenged
by the hodge-podge of enforcement actions, however well-intentioned,
taken at the state and local level.
Moreover, certain cuts of beef and pork require comparatively more
labor to process compared to other cuts. These include boneless steaks,
which are high value products in high demand. Labor shortages for
fabricating these cuts exacerbate the economic impact on beef and
cattle prices from plant slowdowns. A slowdown at any point in a beef
packing plant creates a bottleneck through the whole plant. Meat and
poultry companies are utilizing capacity to the best of their abilities
with COVID protocol constraints still in place and despite significant
labor challenges.
To be clear, labor challenges were not caused by the pandemic;
COVID-19 only exacerbated the issue. The meat industry has been facing
a labor shortage for some time, and it continues today. Indeed, the
pace of Saturday shifts has also strained available labor and adds to
processing costs. Recent press stories report the industry's
recruitment efforts, including wage increases, signing bonuses,
relocation bonuses, retention bonuses and generous benefits. This labor
shortage impact is not only on processing lines but also warehouse
workers, maintenance positions, and other jobs also critical to
maintaining the supply chain.
Virtually none of the calls for government intervention into the
market acknowledge or address labor availability, even though it is,
and is likely to remain, a significant factor that affects utilization
of capacity. Packers cannot work through large supplies of market-ready
cattle when plants are not fully staffed with skilled labor.
The Private-Sector is Adding Packing Capacity
USDA has announced it will provide $500 million in grants and loans
from the American Rescue Plan to expand meat and poultry processing.
Asking taxpayers to subsidize harvest capacity ignores two fundamental
issues. First, adding more capacity simply for the sake of having added
capacity for a notoriously cyclical cattle supply is short sighted and
could distort more significant and longer-term private-sector
investments. Second, adding capacity ignores the long-running challenge
of finding a sufficient labor pool.
The beef and cattle markets are not static, but rather regularly
adjust to find balance as the chart below shows. The industry responds
to market signals in terms of capacity and the size of the cattle herd,
and ultimately beef demand.
Daily Slaughter Capacity versus Cattle Inventory
With 2022 Projections *
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
* Publicly announced capacity expansions; cattle inventory
implied from USDA May 2021 Livestock Dairy & Poultry Outlook.
Over the past 10 months, in response to market signals, one new
plant has opened, and several expansions and new facilities have been
announced--including those with investment from cattle producer
stakeholders.
2020-2021 Publicly Announced Beef Packing Capacity Expansion
------------------------------------------------------------------------
Announced Est.
Packer --------------- Capacity hd/ State Est. Ownership on-
Date Action day Investment line
------------------------------------------------------------------------
AgriBee Aug. New 500 ID Producer TBD
f/True 2020 Plant
West
FPL Oct. Expans 500 GA $120 mln FPL Q4
2020 ion 202
1
Iowa Mar. Expans 1,250 IA $100 mln National Q4
Premiu 2021 ion Beef 202
m/ 2
Nation
al
Beef
Sustain Mar. New 1,400 NE $300 mln Feeder TBD
able 2021 Plant
Beef
Missour Mar. Conver 500 MO NexGen, Mar.
i 2021 ted feeders 202
Prime pork 1
plant
JBS Jun. Expans 1,050 NE $150 mln JBS Q4
2021 ion 202
1
America Jun. New TBD WI AFG TBD
n 2021 Plant
Foods
Group
--------------
Total +5,200
------------------------------------------------------------------------
Source: company press releases and news coverage.
These new entrants or company expansions were based on decisions to
build or expand based on market conditions, not because of government
intervention. Government interference into the market could well
undermine this industry growth.
This market-based expansion of the beef packing industry is what
cattle industry analysts have identified and called for in various
reports. As a Rabobank analysis stated in September 2020, ``An
additional daily packing capacity of 5,000 to 6,000 head of fed cattle
could restore the historical balance of fed cattle supplies and packing
capacity and still allow for positive packer margins.'' \14\ The
Rabobank report further stated, ``While many have discussed the need
for more geographically dispersed, smaller plants, adding packing
capacity in the name of supply chain resiliency is unlikely to work. It
must be driven by long-run economics.'' \15\ Dr. Koontz expressed
similar concerns about building capacity that is not used when not
needed but built ``just in case.'' \16\
---------------------------------------------------------------------------
\14\ The Case for Capacity; Can the U.S. Beef Industry Expand
Packing Capacity? Rabobank, Sept. 2020.
\15\ Ibid.
\16\ Economic Reasons for What was Observed in Fed Cattle and Beef
Markets During the Spring of 2020, Steve Koontz, Department of
Agricultural & Resource Economics, Colorado State University, May 28,
2020.
---------------------------------------------------------------------------
Small and midsize beef slaughter and processing companies endured
the same challenges large companies faced during the pandemic, perhaps
more so. Artificially creating more, smaller regional harvest
facilities will not prevent future market disruptions nor protect
cattle producers from cyclical or volatile markets. The unintended
outcome could be the opposite.
Proposed Regulatory Actions by USDA Under the Packers and Stockyards
Act will Adversely Affect Producers and Packers
On June 11, USDA announced it planned to propose rules to
``strengthen enforcement'' of the Packers and Stockyards Act (PSA).\17\
The expected proposed regulations would be problematic for several
reasons, including their impact on livestock producers' options to
market their cattle, as described previously.
---------------------------------------------------------------------------
\17\ https://www.usda.gov/media/press-releases/2021/06/11/usda-
begin-work-strengthen-enforcement-packers-and-stockyards-act.
---------------------------------------------------------------------------
The concepts expressed in USDA's announcement are not new and were
considered, and rejected, in the past. When proposed, they will
conflict with legal precedent in no less than eight Federal appellate
circuits, and will hurt livestock producers, packers, and consumers.
For example, USDA plans on re-proposing a rule to clarify that a
plaintiff need not demonstrate harm to competition to bring and prevail
in Packers and Stockyards Act litigation. Additionally, USDA indicates
that it intends to ``propose a new rule that will provide greater
clarity to strengthen enforcement of unfair and deceptive practices,
undue preferences, and unjust prejudices.'' \18\ It is beyond dispute
that eliminating the need for a plaintiff to show harm to competition,
or likely harm to competition, will encourage litigation, most of it
likely specious litigation. That threat will severely limit or
terminate AMAs with all the adverse unintended consequences discussed.
---------------------------------------------------------------------------
\18\ Ibid.
---------------------------------------------------------------------------
Protecting Federal Meat Inspection: The Gold Standard of Food Safety
Under the guise of ``increasing capacity,'' there are various
legislative proposals to allow the shipment of state-inspected meat and
poultry products across state lines without meeting Federal standards,
and even allowing uninspected meat from custom processors to be sold
commercially intrastate. These ideas are ill-conceived.
Federal inspection is a food safety issue, and food security is not
something to be waived for a short run economic inducement. Any company
wishing to sell in interstate commerce should be willing and able to
meet the food safety and other consumer protection standards set by the
Food Safety and Inspection Service (FSIS).
First, these bills ignore the fact that there already exists a
program, administered by FSIS, that allows state-inspected
establishments to ship meat and poultry products across state lines--
the Cooperative Interstate Shipment (CIS) program. Nine states have
elected to participate in the program, with two of those nine, Iowa and
South Dakota, announced during the COVID-19 pandemic. CIS was created
by Congress as part of the 2008 Farm Bill and ensures product moving in
interstate commerce meets the requisite food safety standards. CIS also
ensures a level playing field for all meat and poultry companies
selling product in interstate commerce.
Second, the assertion that meeting Federal standards is too
burdensome for small and very small plants is a specious argument.
There are approximately 6,000 federally inspected meat and poultry
establishments and more than 5,000 of them are small or very small.
------------------------------------------------------------------------
Number of
Size of Facilities Federally
Inspected Plants
------------------------------------------------------------------------
Small (more than 10 but fewer than 500 employees) 2,329
Very Small (fewer than 10 employees or less than 2,866
$2.5M in annual sales)
------------------------------------------------------------------------
Source: FSIS.
Allowing interstate shipment of state-inspected meat opens a
Pandora's Box of potential trade concerns. Under World Trade
Organization (WTO) rules requiring ``like treatment,'' the U.S. could
be forced to accept imported meat and poultry regulated under local and
provincial rules in foreign countries rather than the audited and
verified national inspection systems in those countries, as required.
Moreover, important export markets, which have their own national
inspection systems could deny market access to U.S. beef, pork, and
poultry. Neither outcome is good.
Beef Imports and Country-of-Origin Labeling
Much like USDA's proposed rules, another issue settled legally and
discredited economically has been revived: mandatory country-of-origin
labeling (COOL). In four rulings, each of which the U.S. lost, the
World Trade Organization concluded that COOL was discriminatory and
illegal under WTO rules, and if left in place would have triggered more
than $1 billion in retaliatory tariffs. That is why Congress repealed
COOL for beef and pork in 2015. Despite COOL being in place the largest
and fastest growth in beef imports was in 2014--which was the year the
size of the U.S. cattle herd was at its lowest, as expected based on
supply and demand fundamentals that drive the cattle and beef industry.
When COOL went into effect, per capita consumption of beef in the
U.S. was 60.8 pounds; by the time COOL was repealed in 2015 beef
consumption per capita had dropped to 53.8 pounds. As explained
earlier, up to half of U.S. beef consumption is as hamburger and ground
beef. Most of the beef imported into the U.S. is lean, grass-fed trim
and lower value cuts, which supplements the beef from non-fed cattle
making up 21 percent of annual slaughter as a necessary ingredient in
into processed meat and ground beef. Because of this balance with
imports, steaks, loins and higher value cuts are not forced into such
lower value products, which helps support prices both domestically and
through exports of U.S. beef. According to the U.S. Meat Export
Federation, the per pound price of U.S. beef exports has averaged a 68
premium over the price of imports that go into lower value beef
products.
Conclusion
The discussion above demonstrates that market fundamentals drive
the cattle and beef markets and that what we have seen before and
during the course of the pandemic was to be expected. The North
American Meat Institute is prepared to discuss these issues and work
with the Committee on the issues facing the industry. Thank you for the
opportunity to provide this testimony.
Statement 2
on behalf of national cattlemen's beef association
Introduction
On behalf of America's cattle producers, thank you for the
opportunity to provide testimony as the Subcommittee examines the
resiliency of the beef supply chain.
The National Cattlemen's Beef Association (NCBA) is the U.S. cattle
and beef industry's oldest and largest trade association. In addition
to our 25,000 direct members, NCBA represents forty-four state
cattlemen's associations with collective memberships numbering some
175,000 cattle producers--each of whom has a voice in our grassroots
policy-making process. It is important to note that well in excess of
90 percent of those members are family-owned business entities involved
in the cow-calf, stocker/backgrounder, and feeding sectors of the
supply chain. In other words, true ranchers and farmers.
In a grassroots membership base as diverse as ours, it necessarily
follows that business models and opinions are equally diverse. Just as
cattle production in the western United States is very different than
in the Midwest or Southeast, so too are the methods by which our
producers choose to market cattle between segments of the supply chain.
Our role at NCBA is to facilitate a policy process that respects those
differing perspectives, consults informed expertise, allows for robust
discussion and debate, and ultimately arrives at policy positions that
are representative of the entire industry. It is from this perspective,
based upon that very grassroots policy-making process, that NCBA
submits the following testimony to the hearing record.
Background
The present situation unfolding within the U.S. cattle markets is
highly complex and multifaceted. Some of the underlying dynamics at
play have been present in our industry for some time. Other factors
have emerged more recently. Independent of the origins of the issues
themselves, the present conversations on how best to address them were
recently elevated as a result of two major events.
In August of 2019, a fire at Tyson Foods' Finney County beef plant
in Holcomb, KS wreaked havoc upon the cattle markets. In the days
following the fire, live cattle prices declined substantially while
boxed beef values soared.\1\ At the peak of this market volatility, the
spread between fed cattle and boxed beef prices reached $67.17/cwt--at
the time, the widest gap since records began under Livestock Mandatory
Reporting (LMR).\2\ While the supply shocks brought about by this
``black swan'' event created severe challenges for cattle producers,
those hardships were dwarfed by those brought on by the COVID-19
pandemic.
---------------------------------------------------------------------------
\1\ Boxed Beef & Fed Cattle Price Spread Investigation Report.
USDA-AMS: 2020.
\2\ Ibid.
---------------------------------------------------------------------------
As meatpacking plants began to temporarily close, whether due to
isolated outbreaks of the virus or to comply with local public health
orders, cattle supplies began to build up across all segments of the
supply chain. At the height of the pandemic, the industry realized a
roughly 40 percent decline in beef processing capacity utilization.\3\
The resulting supply and demand dynamics showed similar results to the
Holcomb fire: fed cattle prices fell by 18 percent and boxed beef
prices skyrocketed 80 percent.\4\ While the industry has made great
strides toward recovery, the effects of COVID-19 are still being felt
by cattle producers today.
---------------------------------------------------------------------------
\3\ Ibid.
\4\ Ibid.
---------------------------------------------------------------------------
Recent NCBA Engagement on Cattle Marketing
NCBA has maintained a standing Live Cattle Marketing Committee for
many years, and often employs a working group of market participants,
state affiliates, and outside experts to research specific issues and
offer objective guidance that may be used in the development of NCBA
policies. While a few outside observers have been critical of NCBA's
approach and policies, we have remained committed to respecting the
direction and intent passed by our tens of thousands of grassroots
members through our policy process. To discount those voices around the
country because they do not align with a specific regional or
organizational view is tremendously disrespectful to the very family
operations many claim to be speaking for.
Price Discovery
While declining levels of negotiated trade of fed cattle had
already begun an industry-wide discussion on the subject of price
discovery long before the Holcomb fire or COVID-19, these two major
market disruptors underscored the urgency of this dialogue. In July
2020, NCBA's Live Cattle Marketing Committee met to discuss policy
proposals as part of our organization's 2020 Summer Business Meeting.
Producer leaders from more than forty state cattlemen's associations
worked for more than 6 hours to craft a policy that would help resolve
concerns about live cattle marketing issues and lead the industry
toward more robust price discovery. The NCBA Committee considered
several proposals, each aimed at encouraging greater volumes of cash
cattle trade. After debate, the NCBA Committee recommended and the NCBA
Board of Directors approved a policy that supports voluntary efforts to
improve cash fed cattle trade with the potential for a legislative or
regulatory solution in the future if robust regional cash trade numbers
are not achieved.
As mandated by this member-passed policy, NCBA leadership appointed
a subgroup of the Live Cattle Marketing Working Group to develop a
framework by which NCBA would monitor negotiated trades and establish
benchmarks of weekly negotiated trade volumes. In October of 2020, the
group announced this plan and issued a report titled, ``A Voluntary
Approach to Achieve Robust Price Discovery in the Fed Cattle Market''
(Addendum 1).
NCBA implemented this framework in January 2021. Since that time,
cattle feeders within USDA's five major cattle feeding reporting
regions (the ``5-Area'') \5\ have responded to the need for more
negotiated trade in order to improve price discovery at the fed cattle
level. In an impressively short period of time, many cattle producers,
particularly in the Texas-Oklahoma-New Mexico and Kansas regions, have
adjusted longstanding business models to offer more cattle on a
negotiated basis. In some cases, they have even done so against the
indications of short-term market signals. As a result, negotiated trade
volumes in the first quarter of 2021 increased against recent years
(Addendum 2). Many analysts and agricultural economists have credited
this rise to NCBA's voluntary efforts (Addendum 3). We recently
concluded our analysis of negotiated trade throughout second quarter,
and found that trend had continued. In fact, during 3 trading weeks in
this period, all 5-Area regions exceeded negotiated trade volumes that
current academic research indicates is necessary for ``robust'' price
discovery \6\ (Addendum 4). This is certainly a marked improvement from
trends observed even 9 months ago, and cattle producers deserve high
praise for this work. Unfortunately, some meatpackers have still not
participated in negotiated trade at meaningful levels, jeopardizing the
success of our framework and impeding price discovery for all market
participants.
---------------------------------------------------------------------------
\5\ Alphabetically, USDA's five LMR reporting regions are:
Colorado, Iowa-Minnesota, Kansas, Nebraska, and Texas-Oklahoma-New
Mexico.
\6\ Objective Measures of Price Discovery in Thinning Fed Cattle
Markets. Colorado State University: 2016. (Executive Summary).
---------------------------------------------------------------------------
All transactions require both a willing buyer and a willing seller.
As evidenced by the negotiated trade volumes exhibited in the first and
second quarters, cattle producers have been willing to sell their
cattle on a negotiated basis, rather than utilizing alternative
marketing arrangements (AMAs) such as formulas and forward contracts.
Still, some meatpackers have yet to demonstrate a serious commitment to
purchasing cattle on a negotiated basis. NCBA recently completed the
``packer participation silo'' of our voluntary framework, which will
allow us to gauge whether or not the largest meatpackers are
participating in negotiated trade at sufficient levels.
To be clear, AMAs are very important in the fed cattle trade, and
NCBA supports their continued use as they fit the unique business
models of cattle producers. They allow cattlemen and women to earn
premiums for higher quality cattle and mitigate risks associated with
selling in the spot market. However, equally as important, is the price
discovery derived from direct, buyer-seller negotiations. Just as NCBA
and industry experts warn against a total rejection of AMAs, we also
know that lack of participation in the negotiated market will similarly
result in dire consequences for our industry. The benefits of AMAs
cannot be allowed to come at the cost of robust price discovery. There
must be a balance. That is why we continue to explore new means to
encourage greater use of the cash market and negotiated grids through
our voluntary framework.
While more improvements are still needed to achieve consistency,
including adequate meatpacker participation in the negotiated market,
these results are encouraging. As new and innovative price discovery
tools continue to emerge, we are confident that transactional
contribution to price discovery remains attainable in the very near
future.
Market Transparency
Since enactment of the Livestock Mandatory Reporting Act in 1999
(P.L. 106-78), cattle producers have benefitted from the consistent and
timely reporting of market information by USDA. Producers utilize this
information to make informed marketing decisions that best suit their
unique business needs. LMR requires Congressional reauthorization every
5 years and was set to expire at the end of the 2020 Fiscal Year. A 1
year extension of the program was included in the Consolidated
Appropriations Act of 2021 (P.L. 116-260), and it is currently
authorized through September 30, 2021. NCBA strongly supports LMR and
urges Congress to ensure that this critical tool does not expire.
Though LMR is essential to cattle producers, improvements could be
made to the program to increase transparency within the cattle markets.
Though many of these proposals can be adopted through the regulatory
process, NCBA supports the establishment of a cattle contract library,
reporting of formula base prices, and next-day carcass weight reporting
among other things. We believe that these new reports could further
benefit producers in marketing their cattle. USDA is required by law to
protect the confidential business information of entities who report
market information under LMR.\7\ To implement this mandate, USDA
established the ``3/70/20'' confidentiality guidelines in 2001. Under
this provision, price reports are published provided each report meets
three conditions over the most recent 60 day period:
---------------------------------------------------------------------------
\7\ 7 U.S.C. 1636(a).
(1) At least three reporting entities provide data at least 50
---------------------------------------------------------------------------
percent of the time;
(2) No single reporting entity provides more than 70 percent of the
data for a report; and
(3) No single reporting entity may be the sole reporting entity for
an individual report more than 20 percent of the time.
While NCBA recognizes the Agency's requirement to balance the need
for information with safeguarding confidentiality, the 3/70/20
guidelines have often resulted in withheld reports throughout the major
cattle feeding regions--most notably in the Colorado region. NCBA
supports efforts to revisit confidentiality rules to reduce instances
of nonreporting, and will continue to work alongside allies on Capitol
Hill and with USDA to ensure this critical information remains
accessible to cattle producers.
Processing Capacity
Adequate beef processing capacity is critical to maintaining
profitability in the cattle industry and providing a steady supply of
essential food products to American consumers. Currently, there is a
serious shortage of processing capacity (commonly referred to as ``hook
space'') throughout the beef production system. A recent study by
Rabobank found that excess operational beef processing capacity--or
hooks available in addition to those used to process existing fed
cattle supplies--fell to zero in late 2016 and turned negative in early
2017. The same study found that, under the current dynamics of supply
and demand, the industry could economically accommodate an additional
5,700 hooks of daily processing capacity. This equates to roughly 1.5
million additional animals per year.\8\
---------------------------------------------------------------------------
\8\ Aherin, Dustin. The Case for Capacity. RaboBank: 2020.
---------------------------------------------------------------------------
At present, the processing sector represents a bottleneck in the
overall beef supply chain. The result has a negative effect on cattle
producer leverage in fed cattle negotiations. When cattle supplies
exceed the capacity to process them, the livestock become a less scarce
resource and cattle prices decline. It is important to note that this
is independent of demand for beef. Even when demand for U.S. beef is
strong, a lack of processing capacity depresses prices for live cattle.
The most pointed examples of this can be found in the Holcomb fire and
COVID-19. In both cases, operational beef processing capacity
utilization fell dramatically following temporary closures of high-
throughput beef plants. As a result, cattle prices declined, and boxed
beef values drastically increased.
To improve producer leverage in fed cattle negotiations, either
cattle supplies must be reduced, or processing capacity must be
expanded. Herd contractions and expansions occur naturally over the
course of a somewhat predictable 10 year cycle. Currently, U.S. cattle
inventories are cyclically high,\9\ but beef demand is also high both
domestically and in our major export markets.\10\ The clearest solution
to meeting this demand while fostering profitability throughout the
supply chain is to expand beef processing capacity.
---------------------------------------------------------------------------
\9\ Cattle Report, USDA-NASS, January 2021.
\10\ Factors that Drive Beef, Cattle Prices to Record Highs.
RaboBank: 2021.
---------------------------------------------------------------------------
Meatpackers of all sizes face similar operational challenges, the
most consistent and severe of which is labor recruitment and retention.
The largest barrier to entry, however, is access to sufficient capital
for construction. The industry average startup cost for a meat
processing facility is roughly $100,000 per hook.\11\ This means that a
modest 25-head-per-day plant would need to secure $2.5 million in
financing just to build the infrastructure. As a further complication,
traditional lending institutions are often unable to provide adequate
financing due to the risk profile assessed to meatpacking business
models.
---------------------------------------------------------------------------
\11\ Newlin, Lacey. So You Want to Build a Slaughter Plant? High
Plains Journal: 2020
---------------------------------------------------------------------------
NCBA has partnered with lawmakers in Congress to introduce
legislation authorizing federally guaranteed, low-interest loans to
prospective meatpackers. We urge Congress to swiftly take up this
legislation and vote yes to supporting small, local, and independent
meat processors.
Market Oversight
Markets can only properly function when all participants play by
the same rules. While much of the spread between boxed beef and fed
cattle prices during the pandemic can be explained by the inherent
characteristics of supply and demand, NCBA called upon the Department
of Justice to investigate the major meatpackers in June 2020. The
purpose of this request was to ensure that no anticompetitive behavior
or illicit activity contributed to these disparate prices paid for
similar commodities. To date, we have not learned the results of this
investigation, nor have we received any confirmation that it is still
ongoing. Over 100 lawmakers have signed onto letters requesting a
status update from the Attorney General, and NCBA supported most of
these efforts. It is imperative that cattle producers learn the
Department's findings at the earliest possible opportunity. They
deserve transparency and accountability.
NCBA Recommendations
Throughout cattle marketing conversations over the past sixteen
months, a small but vocal minority has suggested--and continues to
suggest--that low cattle prices can be remedied or balanced simply
through a government mandated marketing requirement. This is not
accurate. Definitively, there is no simple solution sufficient to
address the myriad challenges facing our industry. To suggest that any
single legislative, regulatory, or industry-led action will be a
``silver bullet'' is to grossly oversimplify and mislead. Rather,
progress and marked improvement will require a multifaceted response
from the industry, Congress, and Federal agencies.
In Congress, lawmakers should focus their efforts on bringing more
transparency to the cattle marketplace, supporting small and mid-size
beef packers, promoting expansion of processing capacity, ensuring a
timely reauthorization of LMR, reviewing the confidentiality
obligations required of USDA, and continuing oversight of the
Department of Justice to ensure their ongoing investigation reaches a
swift conclusion. NCBA is aware that a handful of lawmakers, are
curious about legislation to require certain levels of negotiated
trade, such as the Cattle Market Transparency Act \12\ and legislation
known as ``50/14.'' \13\ Per our member-driven, grassroots policy, NCBA
opposes government mandates in the cattle market at this time. Our
industry-led effort to achieve price discovery must be allowed the
opportunity to succeed or fail before our membership decides to support
a legislative or regulatory solution. Simply put, the midst of an
ongoing market crisis is never a good time to make long-term, market
altering statutory changes. Careful consideration must be given to the
risk and reward of enacting market-influencing laws for hundreds of
thousands of American ranchers and millions of avid beef consumers.
---------------------------------------------------------------------------
\12\ S. 543 (117th Cong.).
\13\ S. 949 (117th Cong.).
---------------------------------------------------------------------------
As Congress evaluates several legislative proposals intended to
help cattle producers during these uncertain times, we urge thorough
vetting and attentive evaluation of economic assessments and feedback
from the entire cattle industry. As we have for over fifty years, NCBA
is happy to assist the Subcommittee in this endeavor.
Conclusion
NCBA appreciates this opportunity to provide testimony on behalf of
our members--the men and women who put beef on the American dinner
plate. We commend and thank the Subcommittee for taking the time to
delve into this important and complex subject. It has been a difficult
2 years for cattle producers in every corner of the country, and the
Subcommittee's desire to assist them during this time has not gone
unnoticed. Your attention to these issues is greatly appreciated. As we
continue to discuss creative solutions and potential paths forwards, we
stand ready to assist in any way. Please do not hesitate to reach out
to the NCBA Center for Public Policy at (202) 347-0228 with any
questions.
Addendum 1--Overview Presentation of NCBA's Voluntary Approach to
Achieve Robust Price Discovery in the Fed Cattle Market
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Addendum 2--Letter from NCBA President Jerry Bohn to NCBA Members
Regarding Q1 Results of Voluntary Price Discovery Efforts
April 16, 2021
Dear Fellow NCBA Member,
March 2021 marked 1 year since the declaration of a national
emergency due to COVID-19. Nobody could have predicted then the serious
impact the pandemic would have on our nation, the economy, or within
the cattle markets. As states begin the process of fully re-opening, I
am hopeful that the worst of this crisis is behind us. Although the
business environment for cattle producers has improved since March
2020, the volatility caused by the virus continues to impact our
industry.
To improve the business climate for cattle producers, further work
is needed in the area of price discovery. Last October, you received a
letter \1\ from Marty Smith announcing NCBA's Voluntary Approach to
Achieve Price Discovery in the Fed Cattle Market.\2\ This framework,
sometimes called the ``75% Plan,'' was developed by NCBA's Live Cattle
Marketing Working Group Regional Triggers Subgroup as directed by the
Fed Cattle Price Discovery policy (M 1.10) adopted at our 2020 Summer
Business Meeting. As a reminder, the voluntary approach requires the
subgroup to analyze the program's performance at the end of every
quarter. The subgroup has completed its evaluation of the first quarter
of 2021, and I write today to report their findings to the members of
NCBA.
---------------------------------------------------------------------------
\1\ https://policy.ncba.org/Media/Policy/Docs/regional-triggers-
subgroup-report-letter-from-marty-to-ncba-membership-final_10-16-2020-
38.pdf.
\2\ https://policy.ncba.org/Media/Policy/Docs/ncba-regional-
triggers-subgroup-report-overview-presentation_10-16-2020-53.pdf.
---------------------------------------------------------------------------
After evaluating the weekly USDA-AMS negotiated trade data in the
five major cattle feeding reporting regions, the subgroup has
determined that a major trigger was tripped during the first quarter of
2021. According to our member-approved framework, if another major
trigger is tripped during any of the remaining quarters this year, NCBA
will pursue a legislative or regulatory solution to increase negotiated
trade as determined by our membership.
Under the ``Negotiated Trade'' silo of the 75% Plan, one minor
trigger is assigned to each of the regions. The subgroup evaluated the
weekly negotiated trade volumes for each cattle feeding region, and
determined that the Iowa-Minnesota and Nebraska-Colorado regions
exceeded their thresholds under the 75% Plan during all of the
reporting weeks--therefore, passing their negotiated trade threshold
for this quarter. They also found that the Texas-Oklahoma-New Mexico
and Kansas regions each fell short of the threshold during five of the
Q1 reporting weeks. One of those weeks occurred during Winter Storm Uri
and another coincided with mandatory maintenance at a major packing
plant which resulted in a lengthy closure. Both events disrupted normal
cattle flows and brought critical packing capacity to a grinding halt.
The data from the weeks surrounding both events justified invoking the
force majeure provisions of our framework, though a major trigger was
still tripped due to a lack of packer participation. The subgroup will
continue to explore ways to evaluate force majeure events in a more
objective manner.
Let me be clear, our producers deserve high praise for their
diligent efforts to implement the voluntary framework this past
quarter. They offered cattle on a negotiated basis to comply with our
framework, even when market signals were telling them to hold on to
cattle in anticipation of higher prices. Often, these trades were made
at a loss. We recognize the steps cattle producers have taken to
address the need for greater price discovery and market transparency,
and deeply appreciate their actions. Unfortunately, there was not
enough participation in the negotiated market from some of the packers.
Simply put, feeders can offer all their cattle on a negotiated basis--
but we only achieve our thresholds if there is a buyer willing to bid
fairly on those cattle offered.
While the 75% Plan framework calls for the evaluation of a ``Packer
Participation'' silo (in addition to the ``Negotiated Trade'' silo),
this piece of the program is not yet complete, and thus was not
evaluated during this quarter. NCBA continues to finalize the details
with the four major meatpackers. While we are in the final stages of
these negotiations, the basic mechanics have already been established
by the subgroup--and we know that, had this silo been evaluated during
the first quarter, we would have tripped a major trigger with the
packer silo as well.
This quarter, the market fell short of the negotiated trade volumes
outlined in our voluntary framework, but that should not overshadow the
significant improvements made to price discovery since the framework's
implementation. For example, negotiated trade activity is already up
significantly year-over-year in the Texas-Oklahoma-New Mexico region.
TX-OK-NM Negotiated Trade Volume
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: CattleFax; USDA-AMS.
It is apparent that the work of NCBA, and the efforts of the
producers who have participated in this framework, have been critical
in this increase. These gains were made despite residual COVID-19
disruptions, packing plant closures, natural disasters, and a volatile
market. Cattlemen and women should be commended for their efforts to
bring more price discovery to the marketplace. But we still have a ways
to go.
We remain committed to working with all levels of the supply chain
to ensure more fed cattle are offered and procured on a negotiated
basis. Please do not hesitate to reach out to your NCBA officer team or
our staff in Washington, D.C., with any questions or concerns.
Sincerely,
Jerry Bohn,
President,
National Cattlemen's Beef Association.
Addendum 3_Q1 Negotiated Trade Volumes by 5-Area Region Compared to NCBA's 75% Thresholds
NCBA Fed Cattle Negotiated Trade Tracker--2021 Q1
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Week Ending:
Region 75% Category ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold 1/10/2021 1/17/2021 1/24/2021 1/31/2021 2/7/2021 2/14/2021 2/21/2021 2/28/2021 3/7/2021 3/14/2021 3/21/2021 3/28/2021 4/4/2021
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Neg. Cash 7,239 7,331 4,988 6,800 6,929 6,441 6,390 8,376 8,742 6,669 2,774 8,657 4,642
Neg. Grid Base 2,046 4,893 3,356 2,827 5,159 3,690 4,003 5,104 6,299 6,060 3,553 4,649 3,997
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 89,285 812,224 88,344 89,627 812,088 810,131 810,393 813,480 815,041 812,729 86,327 813,306 88,6390
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
KS 15,750 Neg. Cash 13,754 12,481 20,591 10,598 18,085 8,531 8,310 10,830 14,859 17,952 13,259 17,093 13,486
Neg. Grid Base 3,430 2,343 3,410 2,105 3,504 6,198 1,382 4,086 4,383 2,903 3,978 5,442 5,556
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 817,184 814,824 824,001 812,703 821,589 814,729 89,692 814,916 819,242 820,855 817,237 822,535 819,0420
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NE Neg. Cash 23,816 31,081 29,738 30,547 30,312 25,664 25,512 29,886 19,807 34,422 22,850 30,549 21,930
Neg. Grid Base 3,947 5,153 5,371 8,014 6,071 8,456 4,679 4,352 4,403 2,887 3,216 4,760 5,232
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
27,000 Subtotal Neg. 27,763 36,234 35,109 38,561 36,383 34,120 30,191 34,238 24,210 37,309 26,066 35,309 27,162
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO * Neg. Cash 1,573 5,485 2,419 4,333 -- -- -- -- 5,422 4,083 5,097 6,311 728
Neg. Grid Base 1,654 5,498 2,297 4,566 -- -- -- -- 3,155 2,777 1,982 2,071 1,263
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 3,227 10,983 4,716 8,899 -- -- -- -- 8,577 6,860 7,079 8,382 1,991
=====================================================================================================================================================================
8Total Neg. 830,990 847,217 839,825 847,460 836,383 834,120 830,191 834,238 832,787 844,169 833,145 843,691 829,1530
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
IA-MN 12,000 Neg. Cash 19,414 27,355 18,887 24,220 26,081 21,443 20,342 18,668 19,844 18,875 26,397 21,961 26,291
Neg. Grid Base 3,471 4,166 2,984 4,040 2,716 4,394 2,681 4,668 3,095 2,941 3,027 3,004 4,390
8Total Neg. 822,885 831,521 821,871 828,260 828,797 825,837 823,023 823,336 822,939 821,816 829,424 824,965 830,6810
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Pass/Fail 8(465) 62,474 8(1,406) 8(123) 62,338 6381 6643 63,730 65,291 62,979 8(3,423) 63,556 8(1,111)0
KS 15,750 Pass/Fail 61,434 8(926) 68,251 8(3,047) 65,839 8(1,021) 8(6,058) 8(834) 63,492 65,105 61,487 66,785 63,2920
NE-CO 27,000 Pass/Fail 63,990 620,217 612,825 620,460 69,383 67,120 63,191 67,238 65,787 617,169 66,145 616,691 62,1530
IA-MN 12,000 Pass/Fail 610,885 619,521 69,871 616,260 616,797 613,837 611,023 611,336 610,939 69,816 617,424 612,965 618,6810
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Zeroed cells denote unavailability of data due to confidentiality.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Region: USDA-AMS Report:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM LM--CT156 (https://www.ams.usda.gov/mnreports/ams_2483.pdf)
KS LM--CT157 (https://www.ams.usda.gov/mnreports/ams_2484.pdf)
NE LM--CT158 (https://www.ams.usda.gov/mnreports/ams_2485.pdf)
CO LM--CT134 (https://www.ams.usda.gov/mnreports/ams_2670.pdf)
IA-MN LM--CT137 (https://www.ams.usda.gov/mnreports/ams_2672.pdf)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Addendum 4_Q2 Negotiated Trade Volumes by 5-Area Region Compared to NCBA's 75% Thresholds and 100% of ``Robust'' Price Discovery
NCBA Fed Cattle Negotiated Trade Tracker--2021 Q2
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Week Ending:
Region 75% Category ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold 4/11/2021 4/18/2021 4/25/2021 5/2/2021 5/9/2021 5/16/2021 5/23/2021 5/30/2021 6/6/2021 6/13/2021 6/20/2021 6/27/2021 7/4/2021
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Neg. Cash 13,387 8,900 3,668 9,055 6,850 7,953 7,071 9,183 5,776 7,470 7,440 1,324 5,355
Neg. Grid Base 4,750 5,643 5,561 7,764 4,998 5,778 6,190 7,936 8,771 7,573 6,990 7,534 5,029
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 818,137 814,543 89,229 816,819 811,848 813,731 813,261 817,119 814,547 815,043 814,430 88,858 810,3840
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
KS 15,750 Neg. Cash 21,343 14,758 6,345 8,374 7,881 8,814 16,536 13,843 9,326 13,602 22,727 2,921 13,291
Neg. Grid Base 5,395 4,984 4,127 8,206 8,350 10,318 7,496 11,021 10,864 9,624 7,499 7,115 12,075
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 826,738 819,742 810,472 816,580 816,231 819,132 824,032 824,864 820,190 823,226 830,226 810,036 825,3660
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NE Neg. Cash 31,150 25,593 21,314 22,886 32,744 23,087 25,735 28,551 17,189 35,353 20,781 18,700 25,960
Neg. Grid Base 6,841 4,338 2,945 5,762 3,371 2,563 10,683 13,562 13,248 16,922 10,141 8,437 7,410
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
27,000 Subtotal Neg. 37,991 29,931 24,259 28,648 36,115 25,650 36,418 42,113 30,437 52,275 30,922 27,137 33,370
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO * Neg. Cash 4,322 2,850 1,708 25,261 995 1,135 857 1,299 -- -- -- -- --
Neg. Grid Base 2,451 2,061 553 2,545 265 210 1,664 2,263 -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 6,773 4,911 2,261 27,806 1,260 1,345 2,521 3,562 -- -- -- -- --
=====================================================================================================================================================================
8Total Neg. 844,764 834,842 826,520 856,454 837,375 826,995 838,939 845,675 830,437 852,275 830,922 827,137 833,3700
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
IA-MN 12,000 Neg. Cash 26,573 27,552 24,529 15,590 26,387 18,389 19,093 21,447 22,738 27,427 16,652 16,347 30,317
Neg. Grid Base 3,053 3,903 2,308 2,998 3,269 4,516 4,413 7,047 4,484 5,195 4,975 3,414 6,035
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 829,626 831,455 826,837 818,588 829,656 822,905 823,506 828,494 827,222 832,622 821,627 819,761 836,3520
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
75% Thresholds
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Pass/Fail 68,387 64,793 8(521) 67,069 62,098 63,981 63,511 67,369 64,797 65,293 64,680 8(892) 66340
KS 15,750 Pass/Fail 610,988 63,992 8(5,278) 6830 6481 63,382 68,282 69,114 64,440 67,476 614,476 8(5,714) 69,6160
NE-CO 27,000 Pass/Fail 617,764 67,842 8(480) 629,454 610,375 8(5) 611,939 618,675 63,437 625,275 63,922 6137 66,3700
IA-MN 12,000 Pass/Fail 617,626 619,455 614,837 66,588 617,656 610,905 611,506 616,494 615,222 620,622 69,627 67,761 624,3520
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8100% Robust (FYI Only)0
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 13,000 Over/Under 65,137 61,543 8(3,771) 63,819 8(1,152) 6731 6261 64,119 61,547 62,043 61,430 8(4,142) 8(2,616)0
KS 21,000 Over/Under 65,738 8(1,258) 8(10,528) 8(4,420) 8(4,769) 8(1,868) 63,032 63,864 8(810) 62,226 69,226 8(10,964) 64,3660
NE-CO 36,000 Over/Under 68,764 8(1,158) 8(9,480) 620,454 61,375 8(9,005) 62,939 69,675 8(5,563) 616,275 8(5,078) 8(8,863) 8(2,630)0
IA-MN 11,000 Over/Under 618,626 620,455 615,837 67,588 618,656 611,905 612,506 617,494 616,222 621,622 610,627 68,761 625,3520
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Zeroed cells denote unavailability of data due to confidentiality.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Region: USDA-AMS Report:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM LM--CT156 (https://www.ams.usda.gov/mnreports/ams_2483.pdf)
KS LM--CT157 (https://www.ams.usda.gov/mnreports/ams_2484.pdf)
NE LM--CT158 (https://www.ams.usda.gov/mnreports/ams_2485.pdf)
CO LM--CT134 (https://www.ams.usda.gov/mnreports/ams_2670.pdf)
IA-MN LM--CT137 (https://www.ams.usda.gov/mnreports/ams_2672.pdf)
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Submitted Letter by Hon. Don Bacon, a Representative in Congress from
Nebraska; on Behalf of William H. Rhea III, President, Nebraska
Cattlemen
July 28, 2021
Hon. Jim Costa,
Chairman,
House Subcommittee on Livestock and Foreign Agriculture,
Washington, D.C.
Hon. Dusty Johnson,
Ranking Minority Member,
House Subcommittee on Livestock and Foreign Agriculture,
Washington, D.C.
RE: State of the Beef Supply Chain: Shocks, Recovery, and Rebuilding
Dear Chairman Costa, Ranking Member Johnson, and Members of the
Committee:
Nebraska Cattlemen is grateful for the opportunity to share our
member's concerns regarding the live cattle market, processing
capacity, and market transparency. Our organization is a grassroots
membership organization representing thousands of farmers and ranchers
from every scope and sector of the beef cattle industry in Nebraska.
Live Cattle Market: It is our cattle producer members and their
livelihoods that are directly impacted by the cattle market's ability
or inability to send appropriate price signals up and down the beef
cattle supply chain. In the past decade, those price signals have
encouraged ranchers to expand their cow herds and cattle feeders to
expand their feeding operations as domestic and global demand has
exponentially grown like few could have imagined. Yet today as
wholesale beef prices start to shift from historic highs, the percent
of the available beef supply chain profit margins being passed onto
cattle producers is near historic lows.
It has become painfully apparent to our members that, in recent
years, the ability of the cattle market to send the correct price
signals to producers has been broken. For the greater part of a decade,
this has been a headline issue for members of our organization.
Where we are today is not a result of a malicious plot to purposely
stifle ranchers' livelihoods, but rather has been a progression--across
the beef supply chain over the last 2 decades to become increasingly
more efficient in fed cattle marketing and inventory management as an
industry through the use of alternative marketing agreements (AMAs).
While these efficiencies have benefited some, they came at the cost of
robust price discovery and market leverage for other producers.
Undoubtedly, you will hear today about the positive industry effects of
AMAs, otherwise defined by USDA Livestock Mandatory Reporting as
``formula'' trades, which have helped incentivize the production of
higher quality beef. Please realize, however, that the long-term
proliferation of AMA's has also led to a continued deterioration of
price discovery as beef packers have financially incentivized
commitment of cattle without price negotiation.
Price discovery is a public good. Negotiated cash market
participants invest resources to negotiate and discover cash market
prices for the entire industry, while those who utilize AMAs capitalize
on that investment, benefit from the efficiencies, and make use of the
prices discovered by cash market participants. This type of scenario is
best described as a tragedy of the commons. When an increasing number
of market participants overuse a public good or ``shared resource'' for
their own short-term best interest, abuse of the shared resource
results in less value of that resource overall for everyone in the long
run. Until the price discovery ``public good'' is better valued by both
beef packers and some cattle feeders, the industry will continue on
this downward spiral until there is little to no negotiated trade left
and other outside markets will have to be relied on for price
determination.
How does our industry correct this course? Continuing to focus on
expanding options for market participants to participate in price
discovery is key. Our members seek options that contribute to price
discovery like working with the packing industry to sell on a
negotiated grid--a mechanism that allows producers to garner premiums
for higher value cattle while still participating in the price
discovery process by offering their cattle to numerous buyers. However,
producers have grown frustrated with the lack of willingness of all
packers to offer this marketing option. In order to incentivize packers
to participate in the negotiated market and contribute to price
discovery the industry must either mandate participation, financially
incentivize negotiated trade or penalize entities who continually show
a lack of participation in the price discovery process.
An additional source of frustration for our members is the
continued perception that all AMAs reward carcass merit and therefore
are the sole reason the industry has seen an increase of quality grade.
Earlier this month, Nebraska Cattlemen worked with USDA-AMS to gain
additional insight into the mix of transaction types that comprise the
``formula'' fed cattle price and volume data that is reported by USDA-
LMR. Specifically, NC sought more information regarding the total
volume and/or percentage of total reported ``formula'' headcounts that
are transacted in such a way that USDA quality and/or yield grade
parameters have a bearing on the final price paid vs. the volume and/or
percentage of total reported volume where that is NOT the case.
Analysis of USDA-LMR data from January through mid-May of 2021
indicated rather clearly that in the Nebraska and Iowa/Southern
Minnesota LMR regions (compared to other regions), there is a higher
percentage of cattle that fall into the ``formula'' transaction type
that are simply marked at the LMR weekly Nebraska dressed steer
weighted average price, or possibly that data point plus some
predetermined premium, but there are no other premiums or discounts
applied relative to quality grade or yield grade. We understand why
this type of transaction falls into the ``formula'' data as it is not a
negotiated cash sale, a negotiated grid sale, or a contract purchase--
however we also see it to be somewhat different than a transaction that
involves quality and or yield grade premiums and discounts. Our
specific ask was to look at the prevalence of this type of transaction
type in the LMR ``formula'' data set on a regional, 5-Area, and
nationwide scale.
The results showed that the northern regions, specifically Nebraska
and Iowa/Minnesota, exhibited the highest proportion of transactions
with no premium or discount applied. With the quality of the cattle/
beef not having any direct impact on the net price paid for cattle
marketing in this manner it would appear that any premium being paid by
the buyer is essentially being done to reward suppliers for furnishing
unpriced inventory and consequently reducing the buyers need to
participate/compete in the negotiated market and contribute to the
price discovery process.
Processing Capacity: Just as cattle producers respond to market
signals to expand their cow herds and feeding operations to meet
domestic and global demand, we question why the beef packing industry
has not responded to those same signals for the past 5 years?
Adequate beef processing capacity is critical to maintaining
profitability in the beef and cattle industry, and ensuring a steady
supply of beef and beef products to consumers. Currently, there is not
only a shortage of adequate processing capacity, there is also a
reduction of processing throughput across the country. A recent study
by Rabobank found that excess operational beef processing capacity fell
to zero in late 2016 and turned negative in early 2017, resulting in a
negative effect on cattle producer leverage in fed cattle negotiations
because of lack of competition.
To improve producer leverage in fed cattle negotiations, either
cattle supplies must be reduced, or processing capacity must be
expanded. With domestic and foreign beef demand at an all-time high,
the obvious solution to meet this growing demand without shrinking the
U.S. beef herd is to expand beef processing capacity. We understand
expanding capacity with new construction comes with a certain level of
risk and takes time, but we do believe there are opportunities with
current facilities to help meet the growing demand for beef in the
near-term. Beef packing plants, transporters and our member farms and
ranches are all currently experiencing challenges with labor
recruitment and retention. Congressional action to reform immigration
policy to advance needed H-2A visa restructuring and ensuring state and
Federal resources are available for immigrants to be offered employment
opportunities and to successfully thrive in our communities is critical
to helping current packing plant infrastructure reach full 100%
throughput.
Market Transparency: Another key component to price discovery and
price determination is market transparency. Senator Deb Fischer, in
both the 116th and 117th Congress, introduced the Cattle Market
Transparency Act to address many of our members' concerns in regards to
market transparency. Similar efforts in the House of Representatives,
led by Congresswomen Vicky Hartzler of Missouri, mirror the call for
increasing price discovery and expanding market transparency as well as
the adoption of a beef contract library, 14 day slaughter reporting
window, and ensuring that USDA finds a way to report collected
information in a manner that ensures confidentiality but prevents USDA-
AMS from withholding from the public information collected in LMR.
Thank you for the opportunity to share the thoughts and concerns of
Nebraska Cattlemen members. As we continue to work towards finding
solutions to keep cattlemen and women in business, we look forward to
being at the table to talk through these solutions and take actions to
protect our members' family legacies.
Best,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
William H. Rhea III,
President,
Nebraska Cattlemen.
______
Submitted Question
Question Submitted by Hon. Dusty Johnson, a Representative in Congress
from South Dakota
Response from Jennifer van de Ligt, Ph.D., Associate Professor
Veterinary Population Medicine, College of Veterinary Medicine;
Director, Integrated Food Systems Leadership Program; Director,
Graduate Studies Applied Sciences Leadership; Director, Food
Protection and Defense Institute, University of Minnesota, St.
Paul, MN
Question. The COVID-19 pandemic has shown us firsthand the
interconnection between people, animals, their shared environment, and
the devastation that global diseases can bring to food supply chains
everywhere. In fact, more than \2/3\ of the emerging human infectious
diseases are zoonotic--meaning that they are passed from animals to
people. That is why my colleague, Congressman Schrader, and I have
introduced legislation that would require interagency coordination to
respond to zoonotic diseases through a One Health Program. Dr. van de
Ligt, can you share with us your work in the space of animal health and
protection?
Answer. September 24, 2021
Honorable Dusty Johnson, thank you for your inquiry ``The COVID-19
pandemic has shown us firsthand the interconnection between people,
animals, their shared environment, and the devastation that global
diseases can bring to food supply chains everywhere. In fact, more than
\2/3\ of the emerging human infectious diseases are zoonotic--meaning
that they are passed from animals to people. That is why my colleague,
Congressman Schrader, and I have introduced legislation that would
require interagency coordination to respond to zoonotic diseases
through a One Health Program. Dr. van de Ligt, can you share with us
your work in the space of animal health and protection?''
I am the Director of the Food Protection and Defense Institute and
Associate Professor in the College of Veterinary Medicine at the
University of Minnesota.
The Food Protection and Defense Institute (FPDI) at the University
of Minnesota is an Emeritus Homeland Security Center of Excellence
dedicated to providing leading-edge research, technical innovation, and
education to protect the food system from disruption. Since 2004, FPDI
has partnered with stakeholders across government, industry, NGOs, and
academia to assure product integrity, supply chain resilience, and
brand protection throughout the food and agriculture sector.
In reviewing the proposed legislation you referenced, we submit
that the focus on zoonotic diseases in the proposed legislation, under
the auspice of One Health, is too narrow a definition, albeit an
important component of One Health. According to the Center for Disease
Control and Prevention (CDC), ``One Health is a collaborative,
multisectoral, and transdisciplinary approach--working at the local,
regional, national, and global levels--with the goal of achieving
optimal health outcomes recognizing the interconnection between people,
animals, plants, and their shared environment.'' The CDC definition
continues ``One Health issues include zoonotic diseases, antimicrobial
resistance, food safety and food security, vector-borne diseases,
environmental contamination, and other health threats shared by people,
animals, and the environment. Even the fields of chronic disease,
mental health, injury, occupational health, and noncommunicable
diseases can benefit from a One Health approach involving collaboration
across disciplines and sectors.''
Our work in the space of animal, human, and environmental health,
protection, and sustainability, under the auspice of One Health, is
focused with a lens of food and feed security and safety for the health
of humans and animals including environmental impact. Examples of
specific research and outreach include:
Establishing a cross-functional research and response team
related to African Swine Fever. This team has developed a Risk-
free In-situ Non-pathogenic Assay (RISNA) to speed development
of protection, decontamination, and mitigation strategies to
prevent transmission of African Swine Fever through the food
and feed supply chain. Although African Swine Fever is not a
human health pathogen, introduction of ASF into the U.S. would
devastate the pork industry and lead to additional food
insecurity and nutritional inadequacy concerns within the U.S.,
and internationally.
Leading the premiere food defense training program within
the United States to protect the food and feed supply chains
from the risk of intentional adulteration. Intentional
adulteration has the potential to cause wide-scale harm to
human and animal health. In this role, we offer workforce
development training programs that provide essential skills-
based training to enable food company compliance with the Food
Safety Modernization Act ``Mitigation Strategies to Protect
Food Against Intentional Adulteration.'' We also collaborated
with the Food and Drug Administration and Food Safety and
Preventive Controls Alliance to transition key aspects of this
training to enable instructor-led virtual (online) delivery.
The online delivery began in response to COVID pandemic
conditions, but will be retained as a successful training model
into the future.
Informing food and feed supply chain emergency response. We
produced a 43-issue series of ``COVID-19 Near-Term Issues
Spotting in Food Supply Chain'' \1\ updates from April 17, 2020
to August 21, 2020 that informed our stakeholders about
imminent COVID-19 issues threatening the food supply chain and
national health security. The focus of the updates was related
to the disruption in the beef, pork, and poultry supply chains
that were driven by closures of meat processing facilities for
worker health reasons. Broader food access and food security
concerns were also highlighted. Stakeholders found the
situation updates informative and the distribution list grew
organically to include over 150 Federal, state, and local
representatives across government, industry, and academia. The
updates were influential within the national emergency response
surrounding the meat processing plant closures including
briefing and subsequent action by the White House due to the
issues spotting function and inclusion of actionable
opportunities available to emergency response teams.
---------------------------------------------------------------------------
\1\ https://hdl.handle.net/11299/219252.
Editor's note: the 43 issue series is retained in Committee file.
Educating public and private stakeholders on the importance
of cyber hygiene and protection in the food and agriculture
infrastructure. Our research highlighted several key areas of
cyber hygiene and defense that are unique, and often
overlooked, in the food and agriculture space. For example,
many aspects of the food and agriculture infrastructure require
operational technologies to perform the most critical functions
of production needed to assure food safety (e.g.,
pasteurization, rapid chilling, pressurization, etc.) and/or
protect worker health. Unfortunately, most of these operational
technology systems do have appropriate cyber protections in
place to protect them from disruption. As a result, the
ransomware attacks on JBS and the grain cooperatives, New
Cooperative and Crystal Valley Cooperative, resulted in
shutdown of essential functions adversely affecting the food
---------------------------------------------------------------------------
supply chain and consumer prices.
Informing broader University of Minnesota research teams
focusing on zoonotic diseases, anti-microbial resistance,
vector-borne diseases, environmental contamination, chronic
disease, occupational health, and noncommunicable disease about
the implications and applications of their research within the
food and feed supply chains and facilitating connections for
further exploration.
These research and outreach areas are not the only ways in which we
work to protect the food and agriculture critical infrastructure
through a One Health approach. As you mentioned in your question,
interagency collaboration and coordination will be an essential part of
our success to assuring One Health across human, animal, and
environmental health. We also believe this coordination should extend
broadly across the sector including both public and private
stakeholders. Our engagement in this area and these discussions help
assure that meaningful and productive dialogue continues at all levels
of food and feed production, human and animal health, and environmental
sustainability from farm to fork. We look forward to continued dialogue
and any further questions you may have.
Respectfully,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Jennifer van de Ligt, Ph.D.,
Director, Food Protection and Defense Institute Associate Professor,
College of Veterinary Medicine University of Minnesota.
[all]
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