The exceptional packer profits made during the past 20 months are predictable and explainable, says the cattle market analyst who advised the federal Competition Bureau before it ruled in late April that packers were innocent of collusion or abuse of dominant market power.
Kevin Grier, senior cattle and beef market analyst at the George Morris Centre in Guelph, Ont., told the bureau in a 91-page report that low cattle prices, relatively stable beef prices and resulting high packer profits are the result of market forces.
When the United States closed its border to Canadian cattle in 2003 because of BSE, it resulted in too many animals for limited Canadian slaughter spots and prices fell. However, Grier said consumer demand remained high and because meat from younger animals could cross the border, retail prices remained high and were established on a North American basis.
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“The key point is that the pricing situation in the cattle industry over the past year and a half since May 20, 2003, was entirely predictable,” he wrote.
“The lack of connection between retail-packer beef prices and cattle prices is entirely explainable by the fact that one market, the beef market, is operating on an open North American basis while the other is not. The beef market is in relative supply-demand balance while the cattle market is not.”
It is a conclusion that did not surprise Canadian Cattlemen’s Association president Stan Eby.
“That is what was happening,” he said. “We could see it happening at the time. That’s why we support repositioning so it doesn’t happen again. But the cattle industry believes in a free and open market and that is what is at play here. This is the market reacting to forces and one of the darkest days of it.”
Grier said that in the search for answers to low cattle prices and high packer prices, it is important to understand how markets react to surpluses. A surplus of slaughter cattle turns owners into “desperate sellers. Packers can logically therefore let the market ration cattle flows by lowering their bid prices.”
As well, he argued that no one should expect packers to care about producer costs or profits.
“Note that in this situation or in any commodity market for that matter, the cattle feeder’s cost of production has no significance at all,” Grier wrote.
“Furthermore, the price that the packer is receiving for the beef is also of no significance. Recall that after September 2003, packers were receiving fairly normal prices for beef. That fact, however, does not compel them to pay more for cattle.”
He said that after the U.S. border closed, “there was absolutely no correlation between beef pricing and cattle pricing.”
For anyone who understands how commodity markets function, “this lack of relationship is to be expected,” he added.
