Frustration levels were high in cattle country even before the worldwide coronavirus pandemic shuttered restaurants and other businesses, crippling the U.S. economy and hammering commodity markets. Indeed, many cattle producers believe their markets are broken and the past two months has solidified ideas the system provides too much leverage to the four major beef packers and generates too much volatility from CME cattle futures.
On Jan. 11, the day China reported its first death from COVID-19, CME April Live Cattle futures closed at $127.96. By April 17, CME April Live Cattle closed at $94.65, a 26% decline.
Cash fed cattle prices followed a similar trend. On Jan. 11, USDA’s five-area weighted average cash price was $124.47 per cwt. By April 17 the five-area price was reported at $104.87 per cwt, a 16% decline. How could such a collapse happen when beef demand appears robust?
While the price trend was lower through February and early March, a national emergency was declared by President Donald Trump on March 13 resulting in panic buying of meat and other goods at grocery stores. That unexpected demand hiccup set the stage for another stunning spike in boxed beef prices while cash cattle prices tanked. At one point the Choice boxed beef cutout reached $257 per cwt resulting in windfall profits for beef packers that exceeded $560 per head, according to calculations by Sterling Marketing, Vale, Ore.
The disparity between packer profits and producer losses was similar to the market’s reaction to the fire at Tyson’s Finney County plant last summer, and CME Live Cattle futures displayed the same knee-jerk reaction.
“The futures markets over-reacted,” says Glynn Tonsor, Extension livestock economist, Kansas State University. “Markets react hard, particularly to quite large, very surprising and bearish news.”
However, Tonsor says it’s important to recognize the difference between the Tyson fire and the coronavirus crisis on cattle markets.
“The Tyson fire created a supply shock — the ability of an industry to process cattle,” he says. “Conversely, under COVID-19 we saw a demand shock.”
While retailers scrambled to replenish their display cases, coronavirus outbreaks among workers at packing and processing facilities nationwide began to significantly hamper harvest activity. By April’s end, beef packers had lost at least 7% of harvest capacity due to slowdowns or plant closures. Cow slaughter was also reduced by 5%.
The evidence was found in federally inspected slaughter data for the week ending April 18 that revealed a harvest of 502,000 head, down roughly 22% from the same week a year earlier. Before the COVID-19 slowdowns, weekly cattle slaughter had averaged 634,300 head per week the first 14 weeks of the year, a 4.3% increase over 2019.
Even with the reduced output by packers near the end of April, Oklahoma State University extension ag economist Derrell Peel says plant reductions are mostly resulting in some product disruptions and perhaps temporary shortages of fresh meat.
“Barring a catastrophic combination of plant closures or extended periods of plant disruptions, significant shortages of meat are not expected,” Peel says. “However, the combination of processing disruptions and the continuing challenges of supply chain disruptions means that consumers will likely experience limited meat supplies and selection in grocery stores in the coming weeks.”
Even if the threat of the virus diminishes and states begin to reopen for business this month, the shock to cattle markets could be long-lasting.
“It will likely take several months to get all of the supply and demand components back to normal,” says Sterling Marketing president John Nalivka. “But a meat shortage is not likely. We will still produce about 100 billion pounds of total red meat and poultry this year with well over 27 billion pounds of beef and 29 billion pounds of pork — both records.”
In mid-April, USDA updated its forecast for beef production noting “COVID-19 has caused shifts in the beef demand structure,” and “coupled with global economic uncertainty, it is affecting the entire beef supply chain.”
USDA reduced its forecast for beef production by 255 million pounds from the March estimate of 27.4 billion pounds. Still, that would leave 2020 beef production 1% higher than last year.
Still, cattle producers say estimates of demand and production mean nothing if they can’t find a harvest slot for their cattle — at a decent price. Some cattle sold in late-April at fire-sale prices in the mid-$90s in a “cut your losses” strategy.
“A lot of our problems would be solved by building additional slaughter capacity,” says one large Texas cattle feeder who spoke with Drovers on the condition of anonymity. “Packers simply have too few facilities for the size of the herd, and it just gives them too much leverage.”
Packer capacity utilization has long been a concern for cattlemen, and a recent analysis by Tonsor and Iowa State University economist Lee Schulz suggests those concerns are well-founded. Their analysis examined the impact of capacity utilization on the USDA five-area weighted average fed cattle prices.
“This model indicates that a 1% increase in national beef packing plant utilization corresponds with a 1.32% reduction in fed cattle prices,” Tonsor and Schulz wrote. “Accordingly, for demonstration purposes, if the industry operates at 20% lower capacity rates (increased capacity utilization), then we may anticipate fed cattle prices to decline by 26.49%. This clearly demonstrates the economic importance of packing plant utilization on cattle prices.”
Investigations Into Market Manipulation
Topping the list of actions cattle producers want to see as a result of this spring’s coronavirus crisis is an investigation of potential packer market manipulation. Ag Secretary Sonny Perdue affirmed he would expand USDA’s investigation into cattle markets.
On April 8, Perdue tweeted, “Packers and Stockyards Division will be extending our oversight to determine the causes of divergence between box and live beef prices, beginning with the Holcomb Fire.”
The response came amid mounting pressure on Perdue and President Donald Trump from cattle groups.
Twenty-three state cattle groups requested a formal Department of Justice (DOJ) investigation into any evidence of fraudulent business practices within the U.S. meatpacking industry.
“Our members are facing economic and financial destruction during the current crisis, which is compounded by the extreme market shift following the fire in Holcomb, Kan., eight months ago,” says Missouri Cattlemen’s Association President Marvin Dieckman. “One segment of the industry is making unprecedented profits while the rest of us are counting pennies. We cannot afford to wait another eight months for results of an investigation.”
In a letter to DOJ, the 23 cattle organizations said recent events emphasize how volatile cattle markets are.
“The nature of previous and current concern in both situations is extreme market degradation to the producer segment quickly followed by sharp increases and unseasonal profitability to the packing segment through boxed beef prices,” penned the 23 state cattle organizations. “The repeat nature of these market reactions absolutely emphasizes how the production sector of the industry is exposed to the highest potential for risk with little-to-no leverage to change that risk position.”
The groups say the investigation “is of vital importance to the future of one of the largest sectors of U.S. agriculture.”
Read original article: https://cattlemensharrison.com/surviving-covid-19/
By: Drovers