Tyson’s unfortunate fire at its Holcomb, KS plant was certainly a misfortune for the entire beef-producing sector. One thing we learned was that we really have no idea what the real throughput is, collectively, in the nation’s packing plants. The packing industry surprised everyone by processing 9,000 more cattle than they did the prior week. However, it really shouldn’t be a surprise because two weeks before Labor Day is always a high slaughter week in anticipation of robust Labor Day sales.
As expected, conspiracy theories are being passed around to the extent that Secretary of Agriculture Sonny Perdue was required to get involved. Of course, packers are to blame for the decline in fed cattle prices and the rapid advance in boxed beef values. Packers were earning between $400-500 per head, the widest margins ever. Why this is a crime, I’m not sure.
Anyway, Perdue said, “As part of our continued efforts to monitor the impact of the fire at the beef processing facility in Holcomb, KS, I have directed USDA’s Packers and Stockyards Division to launch an investigation into recent beef pricing margins to determine if there is any evidence of price manipulation, collusion, restrictions of competition or other unfair practices. If any unfair practices are detected, we will take quick enforcement action. USDA remains in close communication with plant management and other stakeholders to understand the fire’s impact to industry.
“I have spent this summer visiting with cattle ranchers across the country,” Perdue said, “and I know this is a difficult time for the industry as a whole. USDA is committed to ensuring support is available to ranchers who work hard to feed the United States and the world.”
Fed cattle prices did drop like a rock, roughly 5 percent, and wholesale beef prices shot up somewhere around 9 percent. The week after the fire no one knew where the market would settle out. Someone threw a number out and the buyers and sellers took the bite. The packers knew precisely how much beef they needed to fulfill orders and that would be the only hard number available.
Hate to say it but I don’t think there was a gun to anybody’s head to buy or sell. Cattle feeders are in a remarkable position for August. They are extremely current and had more leverage than usual. There was no August wall of cattle like there can be.
Packers knew where they were sitting to fill orders and retailers knew that the fire could short their orders. Cattle feeders lost, packers won big and retailers probably lost, paying high cutout values. Much of the markets is based on perceived or future value. Retailers thought they wouldn’t get the beef they ordered, which turned out to be a false assumption. Cattle feeders, especially Kansas feeders, felt they had to get cattle to the market now and sold into a lower market. I would be relatively certain those cattle were hedged.
The only thing I can think of as to why the market dropped so quickly was panic; folks simply panicked and sold their positions in the futures. The immediate Monday after the fire, Western Video held its two-day sale in Cheyenne, WY. Everyone involved knew about the fire and expected the futures market to open limit down Monday morning, Tuesday morning same thing. Feeder buyers were cautious but took advantage of the negative news. One seller took their entire 2,500-head offering off that day’s sale. There were many others.
Feeder cattle markets have slowly come back and regained $8-10. The fed markets have gained a bit back. But post-Labor Day fed markets tend to decline too. What I don’t like is the deferred feeder cattle futures contracts, which are at a deep discount to August. Could cattle feeders be shorting the feeder cattle futures so they can buy them cheaper in October or November?
Point is that everyone is going to take advantage of a market situation if they can. They can make money on both sides of the market, long or short; it’s going to happen. So, is our fed cattle marketing system broken? Is the auction system the best price discovery tool we have? We know that consumers are spending more on beef than ever before, so there is plenty of money in the beef universe. Right now, who makes the money is all about who has the leverage. — PETE CROW
