The long-awaited USDA report on the Tyson Fire in Holcomb, KS, and the onset of the COVID-19 pandemic has been released. If you’re looking for a smoking gun, you’re not going to like the USDA report.
Last fall, USDA began investigating the market impacts of the Kansas Tyson processing plant fire. The department expanded its investigation to include impacts from the COVID-19 pandemic this spring, and has released its initial findings.
The Boxed Beef & Fed Cattle Price Spreads Investigation report is more of a recap of events that took place. Both events caused a disruption in the supply chain, and fed cattle that were ready for slaughter weren’t able to be processed. Then cattle inventory built up and an oversupply was created, and the market responded. An instantaneous drop in packer demand, or ability, forced prices of fed cattle down. It’s that simple.
The Holcomb fire was a little different, and shorter. Having a fire two weeks before Labor Day, one of the better consumer demand weekends for the year, made things worse. Collectively, packers were able to add capacity to existing plants and do more processing on Saturdays, so they were able to satisfy demand and customer orders. The market took about eight weeks to return to normal.
Then COVID-19 hit, and plants had to close because their workers were getting the virus; soon packing plants were considered a hot spot. Workers were scared or unable to return to work. Packing capacity dropped 35 percent in April. Again, no packer demand, however there was no shortage of consumer demand, which drove the Choice cutout to $475/cwt.
The week of the fire, during the last week of July, dressed fed cattle were trading at $181.81. The week after the fire, fed prices dropped to $169.81 and by the end of September fell to a low of $159.06 before recovering to $174.67 by the end of October. It took the industry two months to recover from the overreaction that occurred after the Holcomb fire. Feeder cattle prices recovered much faster; after three weeks prices were higher.
Price discovery was discussed in the report and referred to Livestock Mandatory Reporting (LMR) and improved price discovery. I think price discovery is pretty well settled for feeder cattle markets, since most sell at auction. But for fed cattle, it’s different. We have the futures market as an indicator and the negotiated fed cash trade. The report recognizes that some of the five reporting areas are unable to report transactions because of confidentiality. For instance, in Colorado JBS and Cargill are the only players and reporting trade would not be masked as intended.
It has been suggested that LMR change the reporting areas to include at least three competing packers, like expanding Colorado to include the West Coast. They also report that there has been some discussion about the concept of creating and compensating a pool of negotiated cash market traders. I’m not sure how that would work.
The LMR program collects a lot of relevant data. Knowing how to read that data can be challenging. LMR needs to be reauthorized by Sept. 30 of this year. The industry should determine what combination of data would be more useful. LMR could interpret that data better.
Roughly 60 percent of packer-to-retail sales are sold on a formula. Wouldn’t a base price for those formula trades be worth knowing? Is there a premium paid to producers for delivering cattle outside the 21-day window? The data must be there, but it must be presented to industry more clearly. Industry groups should get their wish list together soon and present it to the Agricultural Marketing Service.
Risk solutions for small to medium operations—here is where they talk about teaching everyone about the multitude of risk management products, not just from the CME but also USDA price support programs. USDA’s Risk Management Agency has a bunch of programs to help small producers. It’s also been discussed to make smaller livestock futures contracts, like 20,000 lbs. Cargill recently donated $3 million to NCBA to start an education program. But remember, it’s going to cost you something.
Then USDA will look at amending the Packers and Stockyards Act. USDA has issued a proposed rule change that would further define what undue or unreasonable preference or advantage has occurred in violation of the Packers and Stockyards Act. They talk about producers proposing legislative remedies such as the 50/14 rule.
The Justice Department is also investigating the situation and the Big Four packers. It will be interesting what this tells us. I would assume it will be more revealing on packer margins and the different procurement programs packers offer. This report just might have some teeth in it. I wouldn’t assume any antitrust violations because four packers have controlled most of the fed slaughter for 80 years.
Packers don’t like being shut down any more than we do. We learned a disruption in the processing or distribution part of the chain is dangerous. — PETE CROW