Practically Ranching
Join Matt Perrier as he visits weekly with interesting, thoughtful, entertaining individuals within the beef community. Conversations will inspire curiosity and creativity while maintaining the independent spirit and practical nature for which ranchers are known.
Practically Ranching
#55 - Don Close, White Papers and Black Swans
Don Close is Terrain’s Chief Research & Analytics Officer. Don’s prior experience includes his work as a senior animal protein analyst at Rabobank, and as a market director for the Texas Cattle Feeders Association, where he worked on all economic and market-sensitive policy issues for cattle feeders in Texas, Oklahoma and New Mexico.
In his three decades of professional experience, Don has been a licensed commodity broker, handled risk management and pricing for large cattle operations, managed a grain procurement program, and published market updates and outlooks for cattle and hogs. Don has conducted research on a wide range of topics including confinement cow/calf operations, dairy-beef crossbreeds, and development in international trade. Don earned his BS in agricultural economics from West Texas A&M.
www.terrainag.com
dclose@terrainag.com
Thanks for joining us for episode 55 of practically ranching. I'm your host, Matt Perrier. As always the podcast is sponsored by Dalebanks Angus of Eureka, Kansas. Don close is the chief research and analytics officer for terrain ag. He has held various positions with many organizations throughout the beef industry. And Don has always been able to meld that easy going demeanor of his with a deep understanding of economics to help producers and agri businesses make informed decisions about managing risk and marketing cattle in the most profitable ways possible. Now, when I invited Don on the podcast a couple of weeks ago, we were in the midst of the market downturn following our most recent black Swan event, the announcement of HPAI, in a handful of dairies, and then a subsequent human case that was linked to this pathogen. I wanted Don to talk about this one and other black Swan events through the years and the effects that they can have on our industry, and Don was very willing to do this, but his response was,"we can sure talk about that, but I don't think we can fill an hour up with that topic." After we got rolling Don quickly realized that while I might have one topic of conversation in mind, when I reach out to a guest, this topic usually leads to another. And another. And another and another. So much so that when we finished Don chuckled and said,"that was a pretty wide ranging conversation. Just another day of practically ranch in Don. Just another day." Don and I hit all the C words, calf contracts, the CME group, cattle contract library, carcass size, confined, cow feeding. The cattle cycle and we even threw and a few other consonants just for good measure. It was a fun conversation with a veteran of the beef industry, and I think you're going to enjoy it a lot. So as always, thanks for tuning in, God bless you all, and enjoy,this conversation with Don close.
don-close_3_04-19-2024_133238:after all the years I've done this, I don't know that I've ever said anything I wish I could take back. Uh huh. Uh
Matt:said that, I have to tell you a comical story about just how much I've come around in 10 years, I, I'm embarrassed to admit the name Don Close wasn't a household name for me until I read an excerpt from a white paper that you wrote in about I don't know, 14, 13, something along there about, uh, ground beef nation...I don't remember what the title was. And in your defense, I think that I had already gotten the spin because it was excerpts that had come out of there that someone had editorialized. And I was convinced that you were the antichrist wanting to turn every Beef animal into hamburger and um, so yeah, I, I'd say, uh, I don't know whether it was good, bad, or indifferent, but I all of a sudden knew who Don Close was pretty quickly there after you wrote that. Was I the only one? ha ha ha ha ha ha ha ha ha ha ha ha ha
don-close_3_04-19-2024_133238:no, no, no, no, no, no. And one time, uh, Donnie, um, past NCBA president.
Matt:Schiefelbein.
don-close_3_04-19-2024_133238:Yeah. Schiefelbein.. He, he came up to me one time and was saying that somebody that was, uh, had been talking about me and I,, and I asked the question when he said that, I said, what was he spitting on the ground? When he, when he brought it up and said, well, no, we wasn't. but anyway, Donnie's deal is that, look at it this way, Don. It made you famous. Said, well, yeah, it did that. Yeah, there was a lot of, uh, there was a lot of what I was trying to say there was totally misconstrued and blown out of proportions, but it, it was a big deal.
Matt:You know, I went, I went back and read, I didn't read your whole white paper, but I read excerpts out of it years later. And after I think I, I heard you speak somewhere and I thought, you know, this guy actually makes a lot of sense and he is kind of a team player and gets the multifaceted nuances of today's, beef industry, both the consumer and the production sides of it pretty well. And I went back and looked at that and I'm like, you know. In a lot of ways, he's right. And I mean, if you fast forward to today, you can sit in any sale barn across the nation right now and
Track 1:see what cull cows are
Matt:bringing. And I'm not ready to turn everything into ground beef. And I know you aren't either, but it's a pretty,
don-close_3_04-19-2024_133238:never said that.
Matt:I know. I know. And, and like I said, what you said, I, I even pulled an excerpt. Let me see if I can find it here. Uh, that you said, and I think this was an article that somebody had written based off of it and maybe interviewed you, but I've got,"in order to compete in a ground beef nation, the industry must change to a production model that determines the best end use of an animal as early as possible. To keep beef competitive with other protein choices, to meet counter new system for end use categorization, uh, That influences genetic selection, calf selection, cattle management, production costs, and feeding regime throughout the life of the animals required. Uh, one of the outcomes would be the industry would not be pushing lower quality cattle into a grading percentage they could not realistically or efficiently achieve. It could also reduce the tendency to overfeed an animal in the hope of reaching a higher grade." So yeah, I'm, I'm in violent agreement
don-close_3_04-19-2024_133238:I, uh, that's what I was specifically trying to reference the, the cattle in the, in the bottom third of the gene pool. that were way overfeeding to try to make him great. I never had any, any changes or recommendations for the, for the remaining two thirds of that calf crop. I didn't want to touch them at all, but there's nothing that's not how it was perceived.
Matt:I'm sure you're the first man in America beef industry or otherwise that's ever been misquoted by the press or misinterpreted by the likes of folks like me.
don-close_3_04-19-2024_133238:Uh huh.
Matt:But like you said, I mean, whether I agreed with the clickbait, we didn't have clickbait back then, but the headline or not, it made me dig a little deeper and ask a few more questions and actually read what it was you were saying. And sometimes it, it takes a little bit of a red flag or a white paper, whatever, um, to, to make cowboys like me. Excited enough to actually drill down and learn something. And so in that regard, probably wasn't a bad thing.
don-close_3_04-19-2024_133238:with, uh, in the current market, And the run that we're currently seeing on 90s and 90s, uh, the premium over the comprehensive cutout. And I, I've had people, you know, contact me and say, you know, you need to bring up what you said again. I said, you know what, I don't have to bring up anything. I, I said what I had to say. I stand by what I said and
Matt:The market is
don-close_3_04-19-2024_133238:let it happen.
Matt:Yeah. Well, it is an interesting situation because, you know, like you said in that paper, whether the headlines that were written about it, said it or not, we cannot give, and this is my, now I'm giving my opinion, we cannot give up that white tablecloth... And even I would say post COVID that splurge in the retail side to take home and put on the grill or the flat top or the Blackstone or whatever they're cooking that steak or skirt or whatever on, we can't give that part up. That is what differentiates us from pork And poultry and everybody else. It's that sizzle and it's that taste. It's that everything that goes with eating a nice piece of beef, but not everybody can have that every day of the week. And, uh, that's where we are so fortunate. And I think our industry and we can cuss the middlemen all we want as producers, but those middlemen, those packers and further processors and grinders and everybody else. They're not stupid and they see an opportunity to be able to improve every ounce of that animal that we produce and upgrade it to a point where they can get the most out of it. And, and that's where, you know, nuances like imports and lean trim and everything else come into it and really make us scratch our heads. But yeah, it, it's a pretty well oiled machine and it's, it's being driven today, like it or not, it's being driven today by those nineties and by that grind. No
don-close_3_04-19-2024_133238:I did an interview yesterday with Chip Flory. And, and he was determined that we spend way more of that call hawking hogs than what I really wanted to. And we kind of went down that, that road and and talking about the, the, consumer issues that the pork industry is having and the, the fallout of favor with consumers and just that whole palatability thing. And, you know, said, you know, they're, they're exactly where the beef industry was in 1975. Right. And fortunately that beef quality audit brought the realization to everybody that, Hey, we can do something about this, or we're going to be out of a job.
Matt:doubt. We just talked about that last week or a couple weeks back with, uh, with Temple Grandin and that, that and so many other things there in the early and mid nineties, um, came out of simple desperation. I mean, value based marketing, branded beef, moving those injection sites and, and handling those cattle better. Thanks to the beef quality audit audit and check off dollars that were placed into that research. I mean, that it was. We did it because there was nowhere to go but up or out if we weren't careful. And, and, uh, you can see, I mean, I know, I think you said that you just had a conversation with Dr. Ted Schroeder, who's been on this podcast a year ago or more probably, but he just wrote a pretty good article in BEEF magazine mapping. overlaying the value that those cattle have brought to the industry, right alongside what the choice and prime percentage rates have gone. And from 96 forward, it's, it's, it's, amazing how highly correlated those two charts are.
don-close_3_04-19-2024_133238:and you look at that, uh, 25, 30 percent increase in choice and prime carcasses that we've seen as a result of that, and, you know, in my view, that, that has been the game changer. And you, you take where that started with. One in four beef eating experiences being called dissatisfactory to where we are today. You know, industries are in this spot. They have.
Matt:Well,
don-close_3_04-19-2024_133238:did a good job of that article.
Matt:yeah, it was interesting. I mean, it, it, even for a guy that, uh, that sometimes has to really keep himself focused to read through an economist's charts and graphs. And, and I, I sat through a couple of, of Dr. Schroeder's classes in undergrad at Kansas state. And, and he, he was one of the few people that could even get my attention on, on economics, but, uh, no, he did a great job and it's, it's. Unbelievable just, just how closely those things have tracked and just how much value it's driven into producers pockets. We can argue whether the industry and whether the market and the supply chain today does it right in terms of distributing that dollar, those extra consumer dollars, amongst all the participants. We can argue that at every industry meeting we want, and we may hopefully, you and I, get a cut chance to talk about that later on. But, uh, but yeah, in, in the end, that focus on quality from genetics, management, feeding, all the way on through marketing, merchandising has driven an immense amount of value into the beef chain. So we talked about your white paper a little bit ago, and we've thrown out a few other colors. the term black swan is something that I don't think I'd ever heard of until just the last decade, maybe less. And now, between a processing plant fire in Holcomb a few years back, and a virus called COVID 19, and I don't know how many others, I guess we can go all the way back to the cow that with the BSE case and, and all of these things. We continue to hear about Black Swan events and especially, or specifically to the beef industry and, and just for kicks, I went back and, um, I think this was, uh, Britannica or Wikipedia or somebody that gave me the actual definition of a black swan event. Not particularly to beef, but"the black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of of hindsight." Uh, and then it goes on to talk about the, where the term came from and, and how it was linked. And it's been pretty recent that it was linked to financial markets and things like that. I mean, even here since the new millennium, 2001, 2002, I saw different, different times there that were accredited, but I thought that was interesting. You know, everybody knows that it's something that catches us by surprise and it has a major effect to a market or to whatever else. But my favorite part was. It's often inappropriately rationalized after the fact with the benefit of hindsight. And I guess we could say that about any markets, but man, oh man, in the beef industry, how many of these things have we seen here recently and why is that? And is, is, uh, is there something more that we as producers can do about this to prepare for our own businesses?
don-close_3_04-19-2024_133238:So my contention with that is, and I've wanted to, I've wanted to do a research piece on it, but I've, I've wanted to use TCFA's newsletter file as the source of information And go through there and look at the number of whether we called it a black swan or not market disrupting, unexpected, uh, market disrupting occurrences in the market from, you know, we're have go back as far as you want to go. And my contention is that they're really no more frequent today than what they've ever been. It's just that now we've got that term. Um, On front of minds that we're going to have these huge market disrupted. Exactly.
Matt:For those of you who weren't seeing the video because I don't publish video. I held up my iPhone so they are not necessarily happening with any more regularity Is there any more intensity to them?
don-close_3_04-19-2024_133238:,I, I would probably go to the backside of that, that we're probably more orderly with those disruptions today, just iPhone up again, but because of the amount of exposure. We might have more of an impact initially when they hit, but because of the ability to get. Information out. I think the market works through those disasters probably faster now than we would have thinking in the even in the 70s and 80s.
Matt:So we ripped the bandaid off quicker and it may hurt more, but it's shorter lasting.
don-close_3_04-19-2024_133238:Yep. That would be my take.
Matt:Well, it's like the other last weekend, when Iran fired back at Israel and it happened on a Saturday and Sunday. And I heard a commodity trader on a Monday morning podcast say, you know, the missiles went up, the drones went up, came back down while the market was closed. And because of that, we're probably not seeing anything because it's already done. If this had happened on a Tuesday, yeah, it had been a wild week in Chicago. But as it was, you know, we all watched it in real time and it already kind of decided that things weren't. You know, necessarily going to be in up in arms immediately.
don-close_3_04-19-2024_133238:Well, and you and you go clear back to the, uh, to the, what was it October 7th event.
Matt:Yep.
don-close_3_04-19-2024_133238:That was a, that was a weekend event.
Matt:That's true. Yeah. So quite often. Somebody gets the blame when these black swan events happen and it, it, it seems to me you can, you can include this on your research paper that you do with that TCFA data, but who, who gets the finger pointed most at him? Is it the Chicago Mercantile Exchange or the Big Four Packers? Because quite often it seems like it's one or the other that are to blame for all of this, right? But. As from your perspective, um, how do we best, as it said, rationalize this in hindsight and sort through it as it's going on.
don-close_3_04-19-2024_133238:uh, a week ago today, I was on a panel in Kansas city that, that Ted happened to be the moderator of that panel. And they were, and they were, we were looking specifically at, at the cattle market, the current, uh, situation with tight supply, the, the, the price levels were at, and, and my takeaway is this, when I look at the structure of the market, when I look at supplies that we will have for the next two to three years, I really don't worry. I don't go to bed at night worrying about price. I worry about input cost and just what it's going to cost to break evens on cattle, but I'm not worried about price. But I think in this environment, volatility is going to be unprecedented. And, and these, whether it's, it's a total surprise to the market on the, on the whole Black Swan discussion. It just when, when prices get to record levels... to find speculative traders willing to take that long position to go even to new record highs, you know, they, they become fewer and fewer. But the other side of that is when the market's so lopsided as we are today, and any, any weekend event, any news story, it just gets Those long position holders all trying to hit the door at the same time. So for those two reasons, I, as I've, as I've given a market outlook presentations for the last year, I I've told producers straight up. I said, in this environment, if you are not willing to have a risk management plan in place, don't buy the cattle. Uh, just because if you take the. The 22, 23 percent decline we saw in the market in November and December of last year. You take the, the current, the frequency that we'll see. Five to 7 dollar day moves in the market. Uh, it just, nobody is in a position to endure any or many of those back to back. So it's the volatility of the market going forward that really causes me concern.
Matt:So we've got a lot of folks listening to this podcast that would be in the cow calf segment, and As opposed to margin operators who can lay that risk off the day They buy those cattle or that feed or whatever the case may be There are more options historically ten years ago. I think I would have been sitting here saying well What about the cow calf guy? There's no options for him. Options. Alternatives, I should say. Today, as you look at the market, and without leading the witness, um, there are some alternatives that they have. What would you tell cow calf producers who are selling those calves, quite often, one day a year, possibly at the local livestock market? In the fall, the low of the, of the price picture, you know, from historical charts, what do you tell those folks to do to help them survive a black swan event that happens days or weeks before their time to take them to Eureka livestock?
don-close_3_04-19-2024_133238:I think the first answer I would give in this market environment, the opportunity to contract some calves ahead of time. Uh, it's certainly worth looking at, and that option has and hasn't been there in the past, but probably the biggest reason. I'm really an advocate of the LRP products. I don't think it's the perfect tool, but I do think it provides that opportunity for, for risk management for smaller producers, producers who are working with limited budgets and simply can't live with those, that margin call pressure. I would really encourage them to look into those LRP products. And again, I don't want to give it, I don't think it's perfect. I don't know that I'm telling them to do it on 100 percent of their production. But to have part of it covered, that when we get into those unexpected events, Are you going to be in a position to be in the game again next year? I think they, they're doing a very good job.
Matt:How would you change them? If you were to say, wave the magic wand and call the USDA or whoever is in charge of that and say, this is how you could make this a lot more user friendly or better.
don-close_3_04-19-2024_133238:The, the biggest challenge that, uh, because we're not working in even load lots and because they're two separately, uh, traded vehicles. Uh, the delta between the LRP for once the positions in place. And the Delta between the, the, the LRP product and the futures contract, they don't move in sync. So what, what a challenge that the farm credit, the bankers are having is to keep it, keep those accounts margined up against the futures market that can move independently from the price they've selected. And I would, I would encourage I think over time we'll have, we'll, we'll have to take a closer look at that and how to work with it better.
Matt:Well, I know that there have been a few rocks thrown at that program, especially this fall with some, uh, maybe false narratives, but with some, editorializing about that big market move down that we saw in November, October, November, December, uh, being a function of either an imperfect system on the LRP and the option side, or accused wrongdoings by some of the folks that were, that were repping those products. But I think as we've, again, had hindsight and a little rationalization, we've probably seen that it wasn't necessarily any wrongdoings, it was just a function of a perfect storm of, of market forces.
don-close_3_04-19-2024_133238:You know, I, I was, I was in New Zealand for the majority of November and and missed, missed a big
Matt:No wonder it fell apart, Don. You weren't here keeping an eye on it.
don-close_3_04-19-2024_133238:And I didn't, I didn't miss not being in the fray one iota, but I, but I do think that the editorializing and the assumptions that were being made towards the underwriters at that time. was absolute nonsense. I don't, I don't think those underwriters were doing anything wrong whatsoever. And the big, the first reason that I come up with with that is if you simply look at the volume of contracts that they're dealing with and, and even with. With various risk management, uh, positions that I've held in the past; commercial feed yards, uh, even all the way back to future beef. And, and when you're trying to work a deck of that size, the amount of, of contracts that you can do in any given day, the, the number of contracts you can move without swinging the market... uh, you know, you've really gotta be creative to get that done. Those, those underwriters, they're using futures. They're, they're using, uh, over the counter products. They're doing swaps. They're using a whole gamut of tools, uh, to, to keep that volume of, of risk covered to, to say that they're in there manipulating, uh, the future more. I just, I think that was a, a silly, a silly notion from the very beginning.
Matt:Well, we talked a little, or touched on this just a minute ago when we were talking about pointing the blame at Chicago or Big Four Packers or whoever the case may be whenever anything hits the fan. Human nature is such, and I think cowboy nature is even more such, that those who we know the business least of, we When we don't understand it, we don't trust them. And, um, you know, I, I, it doesn't matter if we're talking the Chicago Mercantile Exchange or import and export trade. There are key descriptions to that, i. e. exchange in the CME. You have to exchange. You have to have a short and long. You have to have somebody that'll offset. The position you want to be in. And that's what I get a kick out of and I'm guilty of it as well, but the local conversation sometimes we get into is, well, there's somebody that's sticking it to us. Well, that somebody may very well have been the one that we made money because they were on the other side of the trade or the exchange last time, same way with the Packers, uh, or imports and exports or whatever the case may be. And that nuanced, uh, discussion sometimes gets lost pretty easily.
don-close_3_04-19-2024_133238:You know, because of the roles that I've served over the years and I've, and I'm always been in that, uh, arena of price discovery, I've, I've been in and out of the, of the futures futures market, but so many times I find myself in a position where I'm defending the CME and I never have one of those conversations that I don't get off of that, get away from it. Why am I doing that? You know, why is it my job to defend the CME? They, they can defend themselves. But the point that I'm trying to work towards is if you take the job that the CME does today, the number of listening sessions they have,, to work with market participants on both the, the large speculative side and the, the hedge community, If you take how, how that exchange is run today compared to how it was back under when it was still private, uh, seat holders and you had the old, uh, live cattle market committee. It, it is night and day difference today. they truly want to know what the users of those. Uh, exchange products, they want that input.
Matt:Well, I have as little experience with the CME group as probably Anybody listening to this podcast, but the one thing, that I have noticed just in sitting through a few NCBA meetings, or the one time that I got to go to, or the, the, exchange there in Chicago, it became evident to me that their feeder. Their cattle contracts, especially the fed cattle contract, is one of the few commodities that they still have producers using for risk management. And they've gone down the road in some of these other commodities of seeing just how awful it is when the producers leave them. And they no longer have that actual raw product to back up some of those contracts. And they're fighting like crazy to make sure that it works for us cattlemen, aren't they? Because if they lose us, they know we're going to go the way of, you name it.
don-close_3_04-19-2024_133238:absolutely. And one thing too, that, that, that most people don't realize is that both the live cattle contract and the feeder contract are a, a minuscule, uh, portion of the total volume at the CME, uh, even to a point where. The, the exchange will tell you those are, those products are not profitable for the exchange, but the, they defend them because the CFTC mandates that they leave those contracts on the board. So that's why that's partial explanation of why those livestock contracts draw so much scrutiny. The, the CFTC is mandating that they leave those, those hedge opportunities available. right this year, I say right now, it's been going on for a while, but every five years, the, the CFTC requires that the CME do an evaluation of every contract they're trading, and currently the live cattle contract is, is up for an evaluation. And, and I, this year I'm on that working group, uh, and, and we met, oh, we've had a number of calls, but, but the group met when we were all in Orlando at convention and absolutely some of the brightest minds in the, in the industry today is on that working group. the thing with the, the live cattle contract. Yeah, we, we, we always have the deal with, live weights and carcass weights escalating and, and the frequency that we have to go in there and change the rules under the contract. To keep the live and carcass weights together, there's an ongoing debate on, uh, should we make the, the grading specs and the, uh, the, the weights, change to what they call dynamic specs. So you basically put those, those movable parts on like a three or five year moving average. And you've got some folks that, uh, I would be an advocate for doing it. A lot of them; No, you're going to make the contract too complicated... the contract participants won't know what they're trading on. I don't buy that argument, but I, okay, fine. Um, but the, the, the live cattle contract, if you take the last five years, uh, the delivery, the, the convergence of the expiring contracts, we haven't had any of the huge, uh, delivery debacles that we've had had had in years past, the live contracts actually working quite well. And then you can get anybody to disagree with that on any given day, but, but it actually has. once the evaluation of the live cattle contract is completed, the next one up for review is the feeder cattle contract. And, and I think that's going to be an incredibly interesting, uh, discussion because. The whole basis convergence thing in the feeder contract, uh, way, way more, challenging than anything going on in the live cattle currently. And just the volume of speculative participation and the level of open interest in feeders in comparison to fats just makes it a lot more volatile and harder to work with. That'll, that will be an interesting discussion.
Matt:So, In that discussion we were talking about when you said you know, the fed cattle contracts and the specs need to do its best job of keeping up with the increases we've seen in live cattle weights and carcass weights and, and of course, grading percentages, things like that. We touched on value based marketing and what that has done over the decades to improve consumer demand, improve the product and consistency and quality that we're delivering, but it's also changed the way cattle are priced and how Producers enter into these agreements and, and have you given some thought... I know you've worked with Cal contracts library and some programs like that... we've talked several times. It's been a while, but we've talked several times here on this podcast about trying to, if we can improve on the way value based marketing and fed cattle are priced at least on a base price level for grids and formulas and everything else to be added to or deducted from through premiums and discounts. What are your thoughts? Do we have a system today with, given the week, but 18 to 20 some percent cattle that are sold quote unquote cash basing the rest of those formulas and grids? Or is there a better mousetrap or what are your thoughts there going forth?
don-close_3_04-19-2024_133238:Whoa. Boy, there's a lot to unpack with that.
Matt:You just pick one and go.
don-close_3_04-19-2024_133238:Okay. Uh, first, first up, do, do, am I comfortable with the fact that we have an adequate volume of cash sales each week to, to have comfortable level of, of core price discovery? And my answer would be absolutely yes, we do. And if you take where we're at with cattle and you compare that to over the last 10 years, you know, that, that hog, the hog, hog contract or market has worked with as little as 4 percent of that market. Uh, being negotiated cash sales. So when we're, we're still talking, you know, basically a third. Um, I, I'm comfortable on the price discovery side.
Matt:What about from a re what about from a regional standpoint and specifically Texas, you're very familiar with that panhandle
don-close_3_04-19-2024_133238:yes.
Matt:because it would be significantly lower. And I think
don-close_3_04-19-2024_133238:Oh, it, it, it's a, it, it is significantly lower. And, and even the years when I was still, uh, on staff at, at, on the market desk at TCFA, There would be weeks that we would, we would, you know, in those years, we still worked under the old 5, 000 headroom that we had to have 5, 000 cattle trade at a price to report. Well, that's gone by the wayside, but in those events, when, when we didn't, there were periods of time that we would, we would have to rely upon the, the Western Kansas reported price as a base price. So there's, there's ways to work around that. And my, my most honest opinion, when I look at the price spreads geographically. And there's clearly seasonality to that, as you well know. But if you look at the price differentials we have by market region, the quality of the cattle, the grading percentages, where they're at. I think that the cattle, week in, week out, cattle in all areas of the country are absolutely, honestly priced. And I, and I do, why I say that, I just, I believe in the efficiency of the marketplace. And when you have, let's just say the big four, but when you have that, that number of people havin' to buy that many cattle and they're seeing those closeouts on a, on a weekly basis, they know specifically what they've got. When they bid, you know, when they bid on it. So for that reason, I'm comfortable. Now, to the, when we incorporate the, the, the cattle contract library. When we were asked to do that study, we very clearly knew and told, told everybody at the time. Look, this pilot project will barely be past the six month mark when you're asking us to come back and give a report on this. And the reason that we were under that time squeeze was because that thing had a funding deadline of September of last year. That, so NCBA had to come with their recommendation. To, to should we keep it or, or, or not keep it. So that's why we were under the timeline. Um, we've continued to, to, to build that data set that in the event that we were ever asked to, to revisit it, we, we'll have the big share of the work done. But, um, I was of the opinion, and I still am that. I think I would make it mandatory and a lot of why I'm saying that it would put it under that whole mandatory price reporting umbrella. It would be deemed essential. So when we get into these periods of government shutdowns, for whatever reason, that whole data collection process would continue to work. And that's really a big reason why, uh, I think, I think the system works. Um, and I think it really, it doesn't really provide any new information that wasn't already available to the marketplace under the various mandatory price reporting reports. It just puts them in a, in a format that's much easier to read.
Matt:So if you would walk us through, give us the basics of the cattle contract library for those folks who weren't. In the room when it was being discussed or aren't using or contributing to that.
don-close_3_04-19-2024_133238:Okay. It's essentially taking the, again, it's taking market data out of the, uh, mandatory price reports. Okay. But it's giving us a breakdown of all of the transactions by type. It's giving us a rundown of the premium and discount schedules for quality grades, for yield grades, discounts on carcass weights, uh, discounts on. on. dark cutters and all the out cattle. Um, it's very consistent. Uh, and if anything, it it doesn't, it doesn't change week to week or even quarterly, very stable.
Matt:And those, those for lack of a better term, those formulas, those grids are being submitted by the buyer, i. e. If us premium beef has one grid and Tyson has another grid, they are showing those, but it's what there is some anonymity there. So we don't know exactly who has the highest premium for prime or whatever the case may be, or the largest discount for fours and fives, et cetera.
don-close_3_04-19-2024_133238:It, uh, it takes all the measures not to disclose any individual companies, uh, actions, but it, so it's all, it's all averaged together. And that, that by, by nature smooth, smooths out those price changes to a degree. Uh, but it does show that, again, the, the aggregate of the premiums and discounts, and it does so even on a regionalized basis.
Matt:So switching gears still on the value based pricing discussion. let's let's say that we all agree that we've got enough cattle and they are representative of the base and we're setting that cash price or that base accordingly, and that we are transparent enough with the cattle contracts library that we know what everybody's doing in the aggregate after we put all those grids and formulas together and average that out. Here's a off the wall question for you, especially in a time when we are short cattle numbers, we're making these cattle bigger. I've had a couple, I've had several conversations over the last month with various different people, not all just in the retailer, food service, meat side of things, but even producers, feed yard owners, even who are saying, have we reached a point of at least diminishing returns? If not. Negative returns to the market because huge ribeyes, because overfat cattle, because all of these different things, even two weeks ago, Dr. Grandin was talking about from an animal welfare standpoint that we made them too big. Will there ever be a day when we don't continue to reward maximum production and maximum output per head? In the beef industry.
don-close_3_04-19-2024_133238:The, uh, The first job I had off the farm was a fat cattle buyer for Great Plains Beef in Council Bluffs, Iowa, and this would have been late 70s or about 1980. Um, the, the cattle that we were buying at the time, and, and we were buying cattle with a basically a 75 percent choice grade was our target. And we were buying steers that weighed, uh, 1050 to 12, and we were buying heifers of 950 to 11 were our weight specs. And, and I remember as clear as day, I was sitting around talking with industry folks at the time, and that there was constant complaining then that, These cattle are too big. They don't fit the box. They're not meeting the needs of consumers. And this is all going to backfire on now. Here we are. 50 years later and we're having the exact same conversation when carcass delivery weights today are heavier than the cattle I was live weight at the time.
Matt:Oh my.
don-close_3_04-19-2024_133238:So do I think there's a cap on what we can do? Obviously, yes, I do. But at the same time, I think about it. We can go back to the, you know, mid 1950s. That average live weight will increase with, with very little moderation, but that lightweight will increase between five and eight pounds a year. And it is absolutely linear from wherever you want to start through today. Are we going to make these cows smaller? No, we're not. They're going to continue to get bigger. Will we ultimately, and you think about it for practically speaking, but the only primals that this is a burden is the rib and loin. All the other primals in that animal, we're cutting them up into portion needs and sizes anyway. So where, what I would argue with the animal science crowd is we've got to find a way to cut that, that strip and that ribeye in a different way. to, to reduce the weight of that portion size. We're already seeing that done with strips, where they're taking a strip and cutting it lengthwise and calling it a Manhattan strip. You know, that, that one's pretty straightforward and simple. How do you cut that ribeye differently and, and would have all eaters happy? It's clearly a challenge, but, but that's where I see. We're ultimately going to have to address this problem is how we're breaking that, that carcass down. Not, not that we're going to make cattle smaller.
Matt:So I agree with you from a meat science standpoint, we can do things with a knife and with a little bit of a departure from tradition and fix that. Just like that, where I get a lot of heartburn. is from an animal science and animal breeding standpoint and from a management standpoint, because as Dr. Grandin said two weeks ago, that great big steer that weighs 1, 600 pounds in the feedlot has a great big sister that's starving to death somewhere out in the hills of Eastern Colorado.
don-close_3_04-19-2024_133238:So I think we're on the thing.
Matt:to make that work?
don-close_3_04-19-2024_133238:I think we're on the same page, the problem that I, I see with that. And, you know, I've been involved in the conversation or. Are we simply going to have enough grass available to run the cow herd that we have to have? And I'm not nearly as concerned with that as I have been at times in the past. Because my main reason is, if you take the proliferation we have had of grow yards over the last 10 to 15 years, and the number of true summer grazing programs where We were running steers on grass. Uh, those cattle had been moved into grow yards. As those, as those cattle have been repositioned, that's opening up more grass for the cow herd. So that, that eases my concerns there. Where, where I do have a challenge with it is if we, if we parcel that land down to either quarters or in section increments and producers wherever, whatever the stocking rate is of the geographic area, but they're still thinking about the number of animal units they ran per quarter When their dad or their granddad was running the place and we're trying to run the same number of cows on a unit today And I just think we're way hard. We're grubbing that grass out way harder today by unit than what we did historically.
Matt:Yeah, it doesn't work. And I, I've even heard from folks who stock it on a pounds to the acre standpoint and, and recognize that if they used to be in a seven acre to a cow unit, they're now in a 10 acre to the cow unit because she weighs 1350 instead of 1050. And even those folks are saying, we've got issues. There's grass out there and those cows are eating longer throughout the morning and the day and are still hungry at night. Those cows are maybe not just over grazing, but are thinner, are poorer body condition. I mean, I'm sure you've heard the. Disastrous conception rates that we've seen through the sand hills and North and South Dakota and, and, you know, so many areas. And I think it's been a smoldering storm and that we didn't even see coming, but it's been happening over the last decade or so, some of that, we don't know for sure what's going, but some of that could have some tie to these five to seven pound per year increases in steers. Live weight that we're also seeing in those mothers that raised them.
don-close_3_04-19-2024_133238:Yes, and
Matt:You did
don-close_3_04-19-2024_133238:Probably the smartest admission that I could make at this point the conversation is My universe is price discovery. You know, when, when, when I start talking about, about range management on cows, I need to acknowledge really quickly that I'm, I'm outside of my playground.
Matt:one thing that I thought you might bring up and I have not read this white paper, but did you not do some work on confined cow feeding?
don-close_3_04-19-2024_133238:I did. I have,
Matt:Is that, and I think that has maybe some, uh. Unintended consequences to our industry, but is that something that pencils out and makes sense as we make cows that are maybe outstripping mother nature's ability to provide for them? Uh, are we going to end up having to haul every bite of feed to the cow just to get her to raise that 16, 17, 1800 pounds steer?
don-close_3_04-19-2024_133238:So with just a touch of backstory on that, the, the real beginning of, of the, my thought process on, on the confined cows, I, when we went through that, uh, 11 to 13 drought. I, those were included in the years when I was at TCFA and we, we had the severe, severe drought. You know, the, the big Texas ranches, the, the spade, the sixes, wagner was sending huge blocks of cows to Nebraska, just trying to hold them together, and we were putting those cows in the feed yard, uh, in the, in the panhandle area. So that was just necessity was when I first saw that. We then got down to that whole expansionary phase, uh, in 14 and 15, and so, so that, that's where my thought process started in, in short, the answer is mixed it's mixed because. Will that program work when feed grain prices are low? Yes, it will.
Matt:Yeah.
don-close_3_04-19-2024_133238:But if feed grain prices get really high, it's a huge challenge. The other thing to acknowledge, you are making a massive swap for labor over equity. Because to manage those cows bottled up like that, uh, both with, with feed in and animal waste out, it's a huge labor, commitment. To try to find a happy medium with that, and I, when I look at the number of hoop buildings across, uh, specifically Iowa, but the, the Corn Belt, I think a mixed program is ideal. And when I say a mixed program, I'm talking of get those cows bred, put them in confinement for the winter. As those cows, we get to spring, they're ready to, and we might have to drag the calving season later than what many of them do, but as soon as those cows are ready to calve, whether it's on stocks, whether it's on fresh grass, but get those cows out of there and turn em loose. As soon as you do that, get that building cleaned out, put a set of big steers in there, feed steers for the summer, so you're getting complete utilization of the investment in the, in the building, and then as that set of steers is finished. Those, you're weaning calves in the fall, then you put the cows back in. So, um, a hybrid program is where I would be today.
Matt:That makes sense. I mean, and it, um, Quite often. A mix of all the above is quite often the answer. And that's what that would be from a consumer standpoint. Do you think that tarnishes our image of this cattle on a thousand hills out there and God's green grass, or do they care? I think they're so confused for the most part of what it is we really do. They still think they're all already in confinement and confined feeding organizations, operations, and all this. And maybe they, maybe they don't know enough.
don-close_3_04-19-2024_133238:Invariably, Matt, with that kind of a program, when you're disrupting the natural perceived flow of things, is somebody, would somebody be upset with it? Yes. If you're taking, if you're looking at the reality of how that cow's treated and that she's inside on that, on the
Matt:Yeah.
don-close_3_04-19-2024_133238:night of 40, 40 mile hours blowing snow, uh, Is she better off? I could argue she is, but would somebody feel that, you know, nature's being disrupted? Yeah, it's gonna happen.
Matt:Again, I mean, it's just like so many things that we've talked about so far. it's probably going to change. We're probably not going to do it the way that grandpa did it. And, uh, we don't today. And I think sometimes we yearn for that simpler, quieter, easier time. Uh, I would argue a lot of times that there was nothing easy about those days, but, uh, regardless, the, the industry has changed. It is changing and it will continue to do so. And, um, you know, conversations like these talking about whether it be price discovery, which is in your wheelhouse, but also everything else that you've worked on because you have to, you know, because there's a lot of different things that affect, that animal for the year to two years that it took to get. Him or her conceived and raised and to the feed yard and finally to that processor and onto the retail and food service. So there's a, there's a lot goes into it. Any other major changes you see to the structure of the beef industry or the way we merchandise and market cattle in the next 10 years or so.
don-close_3_04-19-2024_133238:The one thing that I would say is, when we look at the, at the global market, and I'm specifically saying North America here, I'm not saying just U. S., I'm, I'm, North America. But if you look where we're at with, uh, with feed supplies on our production capabilities, and I compare us to Brazil, Australia, New Zealand, I think North America is in a pristine position, uh, going forward to be the ultra high quality supplier to the world. So I think, I think the U. S. and North American industry is really in a good spot there. Um. When I look at the structure of the market and I've all the years that I've been doing this, if you take where we're at today with the empty shelves on, on cows, certainly the empty shelves on replacement, uh, heifers, and then the high percentage of heifers on feed, I think the market is in The most bullishly structured market I have ever seen. And so I don't, I don't want to say that in the context of prices will just run forever. But I think the real beauty of this market is the longevity. This one has in front of us compared to where we've been in other times.
Matt:Well the data would back that up. The thing that those who depend on throughput of cattle through it and even guys like me who love having short supplies because it means higher calf prices, but at what point, how high is it going to have to get? And obviously it's the cost structure that's driving this, but how high do calf prices have to be before we finally do trigger heifer retention?
don-close_3_04-19-2024_133238:You know, we talk about, uh, I think it came up in an earlier conversation, but, but Darryl, Darryl Peel gave that, uh, presentation to Oklahoma Cattlemen's probably a year ago now, uh, or close to it. And he was talking$4 calves,$3 yearlings and$2 fats. And, and I thought at the time, I said, you know, I'm right there with him with a 2 fat. In fact, I've been surprised that we, we haven't seen that yet. And, and we will, with a 2 fat and the prospects for a 3 yearling. If you just take the seasonality of the, of the feeder index today, could, are we going to be strikingly close to that 3 area late summer, fall? Yeah, I think so. When you start talking a$4 five weight calf, that's just a fluff ball. Woo. That one I got to swallow hard. But my point is this. I absolutely believe in economics and I believe the market is going to rally to a point that industry will put a carrot out there that is of size. It will induce these guys to, to start rebuilding cow numbers. It's going to happen.
Matt:Yep, I think you're right. It's just where that point is. And I think we have, because of the absolute rapid run up in 2014, and folks maybe getting a little bit too aggressive in pricing and buying replacement females then, And then the fall in 2015, there are so many people who have this psychological barrier
don-close_3_04-19-2024_133238:I do.
Matt:because they gave 3, 000 or 3, 500 or name the price for a bred heifer or young bred cow, and she may have left their place five, six, seven years later and never paid for herself. And I think there's a lot of that that is maybe pumping the brakes on, on heifer expansion
don-close_3_04-19-2024_133238:I can tell you that as I have done producer meetings throughout this past winter and spring, that with very few exceptions, Have, did I do outlook meetings where that very discussion didn't come up? Um, the, the one thing that I would say is so, and I, I still have remorse for being one of those guys that was recommending buying those females at those prices at the time. So, you know, I, I'm not guilt free in this discussion either, but I think what is so different in this market. Then what we saw then was we, we actually started that liquidation phase on the heels of the great recession and Oh, eight liquidated Oh, eight, nine, 10 and 11, the market had reached a point where we're for as economists, we thought we had reached equilibrium and we were telling guys, okay, it's time to start thinking about rebuilding. As soon as those comments were made, then that severe drought, 11, 12, 13 kicked in, so we just pushed that liquidation phase further. But while that drought liquidation was going on, there were some of those retained heifers working their way through the system under the radar. And so when, when they, those females' calves were started to be hit the market. That's what enabled that build back to occur. So, so what we thought was overnight, it actually started, you know, 11 and 12. This time we don't have that with, with the percentage of heifers on feed. One other point in this area that I think is important to bring up, you know, we're sitting here today with, uh, with retail beef, average retail prices of choice, uh, Retail price on top of eight bucks. Uh, the all beef price right there, right there at 8. So where I will, will we reach a cap where consumers tell us,"Enough, I can't take any more," absolutely. We will from the work that we're doing at Terrain, we're, we're working two separate different models. One is just basically historical regressions of cut out value to retail price. And with, with cut out is X where should retail price be on the Y axis. But the other thing we're doing is real per capita expenditures where we're taking total monthly production, adding imports, subtracting exports, and, and, and, and subtracting cold storage to take total pounds times that retail price. Deflated. And then we're dividing by the population. So we're looking at expenditures over
Matt:per capita.
don-close_3_04-19-2024_133238:Um, that is really high quality work and that enables us to compare beef to pork and poultry, but it also enables us to compare prime beef to choice by quality grade. And, and the bottom line of that whole work is that we're not seeing any waffling in beef demand at this point in time, it's still as solid as it can be.
Matt:on all of those quality grades and breakouts? Or
don-close_3_04-19-2024_133238:Now, when we, when we came off of that deal of the, of the COVID experience and we were in the consumers quickly figured out they could buy a prime, prime steak at the retail counter. Take it home and, and have it for about half the price they were paying to eat out. We've, we've seen that prime, um, uh, demand waffle fractionally. I would also point out that the percentage of prime in the slaughter mix today is about 2 percent higher than it was at that time too, so we've got more of it. the branded product demand base for the branded cutout is absolutely solid. choice cutout is still solid. Um, What we, you know, we're seeing, seeing some noise in the market right now. But, but as we've done that study, uh, if anything, you could, you could argue, we've seen a little bit of easing and select, uh, demand over time. and that probably going to correct, you know, and right now correcting, but overall it's good. It's, you know, will we hit the wall somewhere, yes, but we're not there yet.
Matt:well, we've had that discussion here too. I mean, we have, when I was a kid, every time we would try at this point in the cycle to raise, and I, when I say we, the market would raise that Retail beef price. they'd trade down to pork and poultry really quickly.
don-close_3_04-19-2024_133238:And we're not
Matt:signal would pass. And, and today we're serving them a different product when we have, you know, quadrupled or quintupled the amount of prime and we've taken select almost. I would argue that's why you're, you've got some noise in the select thing is there's hardly any select left. I mean,
don-close_3_04-19-2024_133238:a true,
Matt:you don't have enough quantity to actually. even evaluate that. That may need to go into your ground beef nation, Don. But honestly, I mean, I don't know that we have approached a complete inelasticity, but as long as we're making products that achieve excellence when that guy or gal takes them home and serves them to their family or orders them at Ruth's Chris or wherever else, uh, they pay a lot of money for experiences that don't deliver near what we can deliver with the, with a cut of beef.
don-close_3_04-19-2024_133238:you know, and we're, we're keeping an eye on the behavior of the market since all of the, uh, the COVID bucks I've been worked through, but, but when we're sitting here with a, uh, an unemployment rate running three to 4%, we are seeing, you know, an increase in, Credit card debt. We are seeing an increase even in the the rate of credit card payment delinquencies But it even that is still below the historical average. So Where I'm going with that is when when you have the the wage pressure that we have Just the inflationary wage pressure because of the number of open positions out there unemployment as low as it is, consumers still have disposable income and, and they, they're still, you know, still very active, supportive in the marketplace.
Matt:Well, it's a pretty good story for us as producers. and you know, we talk about cattle cycles and we, talk about are almost embarrassed at these points of the cattle cycle to admit that we sell beef for a lot of money. We're almost embarrassed that we sell calves and yearlings and even fed cattle sometimes for a lot of money. But when you look at what we have in it, labor, capital, you know, not to mention feed expenses and everything else, um, we've probably earned it. And I think that we as producers have to do our homework and dot our I's and cross the T's. And, and we started this thing off talking about black swans, um, make sure that we figure out how we manage risk and make sure we find opportunities to price these profits in when we can and, um, hit singles and doubles and not try to swing for the fences all the time. But yeah, I, I, I'd say we've earned it. I mean, you talked about the cattle cycle responding as quickly as it did there in 14. I think part of that is I remember discussions. Clear back in 08, 9, 10 saying, you know what, maybe this 10 year cattle cycle no longer exists. We almost missed or had a silent cattle cycle in there. We went 20 years before we saw what happened in 12, 13, and 14.
don-close_3_04-19-2024_133238:know,
Matt:That might be part of the reason that that one. Happened so quickly, went up so quickly, went down so quickly. And this one is probably tracking with more of a normal quote unquote, 10 year cattle cycle.
don-close_3_04-19-2024_133238:I, I would, I would agree with that. And, you know, when we, we went through so many years when those peak cattle inventory numbers of 134 million in 1974, and we just saw that continuous erosion, uh, I think that was really a catalyst in there What masked that traditional cattle cycle and we were openly well, is it still there or not? And many times I was on the argument that now it's not there, but once we stabilized, reach that equilibrium point, I'm with you. I think it's very much intact and very visible in this cycle.
Matt:And it helps to know that going into it. So we can recognize. When the right time, you know, when to hold them, know when to fold them. I mean, no, no, what we have and how best to price those going forward. So, well, Don, I appreciate, your time and being with us and, and all the work that you've done. And, I will, if it's okay with you, I will include, Terrain's website and, and, uh, maybe even your email address. And if people want to. Discuss any further and get in contact with you or your team. You do some great work there at Terrain and, and, uh, have with Robbo and TCFA and all the places throughout the, throughout the years and, and whether my first brush with you on your ground beef nation white paper or not was a positive one, I've always looked forward to, to hearing your, uh, synopses and, and, uh, work in beef industry, economics and everything else. So thanks a bunch for being here and have a great rest of the day.
don-close_3_04-19-2024_133238:Well, thank you for putting up with me. I've enjoyed it.
Matt:You bet. Thanks.
Microphone (Yeti Stereo Microphone)-1:Thanks again for listening to practically ranching brought to you by Dale banks, Angus. We've sold most of our registered bred females that were up for private treaty sale, but we still have a nice set of private treaty bulls. And we're also going to have a small group of April calving pairs for sale very soon. They all stem from our foundation cow families developed for decades right here in the Flint Hills of Kansas. They'll make a nice set of registered or top end commercial females for your place. For information about any of these cattle, email me, Matt perrier@dalebanks.com or text 6 2 0 5 8 3 43 0 5. As always. Thanks for listening. God bless. And we'll be back again in two weeks.
