Angus at Work

Solutions to Supply Chain Stress

June 01, 2022 Angus Beef Bulletin Season 1 Episode 9
Angus at Work
Solutions to Supply Chain Stress
Show Notes Transcript

There’s no doubt that the supply chain has been under stress the last two years. But what does that mean moving forward? What does that mean for cattlemen now? Listen to Don Close's solutions to the supply chain stress and what that means for cattle prices.   

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Welcome to Angus at Work. I'm your host, Kasey Brown. The supply chain and its effect on cattle prices have certainly been on top of cattlemen's minds. For the last two years especially, there's no doubt that the supply chain has been under stress, but what does that mean moving forward? How will it affect prices in the future? What does that mean for cattlemen now? I sat down with Don Close, a senior animal protein analyst at Rabo AgriFinance. He's been in the cattle market for 45 years, so he has plenty of insight to share with us and has the research experience to help us look forward. Let's dig in. Hello, welcome. Thanks for joining me.

Don Close:
Good afternoon. Thank you.

Kasey Brown:
Let's get started with what's your background in the beef industry?

Don Close:
I've been in some level of the beef industry for about 45 years now. A lot of years in the commodity risk management side of the business. I have been in the packing sector a couple times. I've been with Rabobank for the past 10 years. Prior to Rabobank, I was the market director with the Texas Cattle Feeders Association.

Kasey Brown:
Did you grow up on a ranch, or how'd you get interested?

Don Close:
I did. I grew up on a wheat farm and a cow-calf and stocker program in central Oklahoma.

Kasey Brown:
All right. What made you interested in econ and risk management?

Don Close:
I started off after I left the farm as a cattle buyer. Through the cattle buying side of it, I got involved with the deliveries against the CME contract and became more and more interested in the appeal of the futures market. That's kind of what dragged me that way.

Kasey Brown:
You're coming at this with practical experience, plenty of that. It kind of feels like supply chain has become a dirty word recently, but it sounds like that things are looking up.

Don Close:
Yes.

Kasey Brown:
Can you talk about that, please?

Don Close:
I don't know that I would go so far to say a dirty word. I would say it's certainly been brought to the center of attention. Along with being brought to the center of attention, because of the COVID situation, labor availability, I think we have stressed the supply chains on multiple fronts, and it's a perfect opportunity to see, evaluate where we are. What do we need to do different?

Kasey Brown:
Let's talk about that. What are some of the biggest stress points and where do you see that moving forward?

Don Close:
I get a very quick agreement from most people that the number one challenge is labor and labor availability. The cost of labor has finally, at least in agriculture, the cost of labor has escalated to a point that it has crossed the threshold where it is now economically viable to look at automation, increased technology to the extent of robotics, where they're available. I think we're in that transitional phase that we won't directly replace labor with technology, but we most certainly will look to enhance labor's efficiency with more technology.

Kasey Brown:
By technology, are you talking in packing plants or... Can you talk to that a bit?

Don Close:
I should have clarified that. On this study, I'm largely looking at opportunities post-harvest, so heavily influenced by inside the processing facility.

Kasey Brown:
Excellent. You're right. The inhibitor to that has always been cost, but right now labor is just nearly as high.

Don Close:
That's the high point.

Kasey Brown:
The study I'm looking at, you say four major issues are driving system change. Let's talk about those. What are some of those?

Don Close:
The first one we've already talked about, labor versus technology. The second one that we've really taken a look at is meat packaging. On the pre-retail level, I think it is very durable and very good product. As you look from retail on, and you look at that traditional foam tray and cellophane, if we need to change up packaging to meet the demands of consumers, whether that be meal kits, whether that be home delivery, just in time. I think the consumers' demands for packaging is changing. Also, improved packaging would enable us to extend the shelf life from a matter of hours, under existing packaging, to days, weeks. That would enable that going from just in time to just in case. The real focus here is what do we need to do to avoid the risk of seeing empty store shelves again. The consumers cannot buy what is not offered to them.

Kasey Brown:
One thing, more people are eating beef at home so that would play very much into packaging and availability.

Don Close:
I agree with that, but I also think they're eating more at home, but how they buy their groceries and whether they're buying them online and how that home-delivery process is fulfilled, that makes a difference on just how durable that packaging needs to be. If we say they're eating more at home, that's true, but there's a lot of subdivisions on how they're doing that.

Kasey Brown:
Let's talk to, let's say, transportation, people are getting transportation on all fronts. People are getting their food delivered to them. How are calves getting to the plants?

Don Close:
Before we move on, I think one of the considerations that we took in the report is many, many times the very consumer that is making requests for improved packaging and improved food safety is the very same consumer who is complaining about food packaging waste and how that applies into, contributes to sustainability, so then the industry's left with the conundrum, I can provide one or the other, but it's a real challenge to provide the durability of packaging but less food packaging waste.

Kasey Brown:
That's kind of a chicken or the egg deal. How will sustainability keep playing into the supply chain as we move forward?

Don Close:
I think it's going to just increasingly be the focal point of the whole discussion. When we talked about sustainability with the packaging situation alone and food and packaging waste, but that really is only the tip of the iceberg when we talk the whole sustainability piece, that animal welfare, animal rights, what's good for the land, and what's good for the people. I think those are great aspirations, but where it plays into is all of these things we've talked about so far and will talk about, individually add cost to the system. I don't think that any one of them by themselves are limiting, but when you pull the whole bundle of changes together, now we have a real challenge of does that higher cost imply higher prices to the consumer, or does that come as a penalty as lower prices to cattle producers? It can only surface in one of two places. That's a lot of what we're trying to address.

Kasey Brown:
How do we decide who pays for it? Is there, I don't know, is that through policy?

Don Close:
I don't think it's through policy at all. I think that's the beauty of the marketplace, that the market will determine that on willingness, what consumers are willingness to pay. A lot of what I was trying to address in this report is if we look at the meltdown of the market in the spring of 2020, when the plant, beef plants were either slowing or temporarily closed and what that did to the live steer price to cutout ratio or the live steer to retail beef prices. Clearly, the burden of that slowdown fell on cattle producers. If we go forward, that increased cost and risk has to be distributed throughout all players in that production chain. That's a lot of what I'm trying to address here is who and how do we move that shock absorber for supply post-harvest instead of having all that risk being pre-harvest?

Kasey Brown:
What have you been finding?

Don Close:
I think, as we've talked, the sustainability piece. It's the right thing to do, it's going to happen, so let's prepare for it. We've already discussed the labor versus automation. Clearly, we've crossed that economic threshold to escalate the level of automation. The other area that I looked at that we haven't yet discussed is the whole transportation front. On that one, I separated it into three pieces. I put truck transportation. I looked at rail transportation and ocean freights, or the backlog we have today at our ports. Of those three, while I think there are complications and we are seeing improvements, but I think as this surge in consumer spending that we've seen for the last year levels off or subsides, the opportunity to clear that backlog from those cargoes from the ports... It needs improvement, but that one will work itself out.

Don Close:
The research showed that the U.S. Is short 68,000 over-the-road truckers today.And that number is projected to be as high as 1 million shortfall of truckers in five years from now. That adds to the conversation, we're developing the driverless trucks and how will that play out? In my take, both of those solutions, either coming up with more drivers or going to a driverless fleet are really a bandaid for a long-term problem, that I think there are limitations to just how much additional traffic our interstate systems can absorb.

Don Close:
I think our real opportunity, both for efficiency of mile traveled and our opportunity for growth would be to revitalize our rail system and use it much more than what we, much differently than how we do now. The current rail system is designed to haul massive quantities of raw commodities long distances. If we were to modernize that system, smaller trains, more specific endpoints, that we have a train of consumer goods designated to Atlanta or Chicago. So, instead of moving this whole bulk of goods, just send it to specific endpoints.

Kasey Brown:
That's really interesting. I hadn't heard of trying to think that way outside of the box. That's what we need right now are outside-of-the box solutions.

Don Close:
The other thing I think's important is we talk, certainly your or my ability to have a voice or influence on how the rail system is managed is really outside of our scope. I looked at this from most of my readers are producers or people involved in agriculture. I'm not presenting this in the light that you need to go fix this, but I am presenting it in a context that you need to be aware of this because if those cost balances shift what cattle producers get paid for that animal, as a share of that finished product, will change as well. You need to factor that into your cost equation.

Kasey Brown:
Perfect. What are any, I guess, action points for cattlemen at this point?

Don Close:
That's a great question. I think the cattlemen, as far as action plans are really, U.S. cattlemen are in a very good spot. Why I say that is, we, as you're well aware, we're seeing total cattle numbers contract, but at the very same time, beef demand, both domestic and export, continues to be robust. We have all of the conversations going on today of increasing slaughter capacity while at the very same time that increased capacity will be met with a smaller supply. When I say the industry's in an incredibly bright spot, I think we have a window of three to five years here with very attractive profit opportunities that allows us to buy time. It allows us to better define what is sustainability and how do we implement it? That's where I see the real benefit right now.

Kasey Brown:
Perfect. I think that's a really great way to wrap this up, but are there any other points from your recent research that you want to bring to light?

Don Close:
As I release these reports over time, and it's always interesting to watch both the producers' or industry's reaction to the reports, see how media reacts to the reports. This one is receiving a lot of attention. I think it's, might be one of those things where timeliness is, and luck might be better than intelligence. I think it's a topic who is front and center right now, that is receiving a lot of attention.

Kasey Brown:
Absolutely. It has so much to do with our livelihoods and how long and what kind of changes are coming ahead. Thank you again for your time. Thank you for sharing your knowledge with me. Before we wrap up, I like to end our podcast with some good news, because we know the cattle business is really a people business. What is something good that has happened to you recently that's either personal, professional, or both?

Don Close:
As we started this interview and asked about background, I've been in the cattle market at some level my entire working career. I look at the growth in exports, the revival of consumer demand, and I absolutely believe it is the most exciting time to be in the cattle industry that I have been a part of in 45 years. I'm really looking forward to the next 5 to 10 years.

Kasey Brown:
It feels like change has just started coming in shorter bursts. You make so much change in-

Don Close:
And much quicker.

Kasey Brown:
Exactly. That is really exciting. We've got a great industry to be part of. Listeners, if you liked this episode, you are going to love the Feeder-Calf Marketing Guide, which should be hitting mailboxes any day now. I will put links in the show notes where you can access the Feeder-Calf Marketing Guide online and where you can also subscribe to the Angus Beef Bulletin and the Angus Beef Bulletin EXTRA. As always, we would love if you would rate and, of course, subscribe to this podcast. We really appreciate your time, and you've been listening to Angus at Work.