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Cattle feeders ranging from independently owned feedyards to corporate conglomerates agree that captive supply is an issue that is here to stay whether they like it or not. "We've seen captive supply or packer controlled inventory go up considerably in the last three years," said Bob Sims, president of Tri-State Cattle Feeders near Hereford, Tex., and former president of the Texas Cattle Feeders Association. Sims, partner in a 15,000 head capacity feedyard, said dealing with a packer that has a captive supply of cattle is similar to him buying feeder cattle when he already has 40 to 50 percent of what he needs coming in each week, and he controls the price on that 40 to 50 percent. He said he would enjoy being in such a situation. Byron Gossett, president of Gossett Inc. of Amarillo, Tex., a stocker and cattle feeding operation, said captive supplies have kept prices low. "You look back in history when the beef cutout was as high as it was in the 1980s, we had fed cattle that brought over $80 cwt.," Gossett said. "When we had show lists as low as we've recently had, we had cattle that sold in the mid-$70s. We had an historically optimum supply and demand situation, and we got the market to $67." While there are a number of variables in the marketplace, Gossett said that captive supply is playing an important role in keeping prices down. "I buy a lot of stocker cattle," he said. "I get a call from a guy every Friday who can't sell me a load of calves because I've already bought my calves for the week. I just shoot him in the foot. I hate to say it, but I do. I know how the packer's thinking because I do the same thing. It doesn't mean we're bad people, but it is a dysfunctional market." The people in the captive supply side of the argument, he said, have good reasons for doing it, but they could be hurting the overall market. Gossett said he believes cattle prices are two to three dollars lower than they would be without captive supply. If someone is getting a dollar more selling on a captive supply or formula basis, he's really three dollars below where he'd be without it, Gossett maintained. It's false economy. "You can't have a healthy market when all the transactions take place in 30 minutes on a Thursday afternoon," he said. "It can't happen when you have four buyers and hundreds of sellers. That's what we have now. I don't know that we're ever going to go back to a negotiated price. I doubt that we will." Tommy Beall, marketing manager for the cattle feeding division of Continental Grain, headquartered in Boulder, Colo., is more ambivalent about the subject. "I'm not terribly negative," Beall said. "I can see both sides of the issue." About half of the cattle the company is feeding are on some kind of grid. Half will be sold through a negotiated price. "I don't think there is a significant difference in quality or kind or value," Beall said. "Cattle sell both ways, but I think it's very naive to think captive supply and less competition doesn't effect the market. I'm sure it does." Beall said, however, that captive supplies have a more negative impact when supplies are large and there are more cattle than there is capacity to kill them. Captive supplies will be less important when the cattle supply tightens. Bill Robertson, cattle procurement manager for Caprock Industries, a Cargill company, works for a company that not only owns feedyards, but packing plants as well. Robertson said formulas and grids will change. Eventually, they could be based on the retail price of beef. Robertson said people sell their cattle on formulas because they think they can make more money. He said there are inefficiencies within the market, but they can be captured. "I do think that formula trading is here," Robertson said. "I think that over the course of the next few years, it's going to change. You're going to see some different things." Paul Coleman, vice president and director of customer relations for Amarillo, Tex. headquartered Cactus Feeders, said his company backed into captive supply. In 1986, a group of Texas cattle feeders, including Paul Engler, the head of Cactus, talked about cooperative marketing. Engler had worked for IBP so the other cattle feeders suggested he should lead the charge. "The idea wasn't for us to end up as one of the largest captive suppliers around," Coleman said. "It was intended to look for a way to offset the strength and power that the packers had with four big packers bidding in the country against hundreds of us." Coleman said he thinks cooperative marketing is still a viable alternative to how cattle are marketed today. "It's certainly an issue that keeps popping up," Coleman said. "It usually pops up when the industry is losing a lot of money. When they start making money, it goes back away. It's probably one that needs to stay more constantly focused." |
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