I spoke at the Wallowa Stockgrowers annual meeting in Enterprise, Ore., Aug. 17, the week following the fire at Tyson’s Holcomb, Kan., plant, and one day after the much discussed “worst week in the cattle market” in several years. I don’t intend to add any theoretical economic analysis to that, but instead a few thoughts that are perhaps more practical.
There was much handwringing over how we could harvest and process the cattle that were contracted or bought by Tyson and destined for that plant. The Holcomb plant accounts for 5% of total annual U.S. cattle harvest capacity.
Cattle were harvested the following week and many of those cattle were those originally destined for the Holcomb plant. And yes, Tyson did pick up the slack at other plants for contracted cattle and cattle originally bound for the Holcomb plant. This course of action will continue – problem solved. Yes, the packing industry can adjust to disruption – rather quickly, I might add.
As for the future, the exact time frame for reopening the plant remains largely an unknown, but I would assume it would be sometime in January 2020. That’s an educated guess. Yes, the fire was very unfortunate. Was it a disaster? Probably not to the extent thought when it occurred and particularly from the perspective of upgrading the plant with robotics that will increase efficiencies.
Perhaps, an unfortunate event can still provide opportunity and particularly when there were no casualties and Tyson has committed to paying all personnel until the plant is reopened.
So, having said all of that, I now pose the question – what happened to the market if the industry can accommodate taking out 5% of harvest capacity? My opinion does not necessarily follow sound economic theory as I was trained in graduate school 35 years ago. I apologize!
Rather, I would submit that the market probably over-reacted and the driver was CME Live cattle futures. From the close on August 9th until August 16th, October Live cattle contract fell $8.52. By August 22nd, that same contract had recouped 30% of that loss, closing at $101.10.
For those same dates, the September feeder cattle futures fell from $138.25 to $132.85, regaining 50% of that loss by August 22. In the same week, USDA’s crop estimates in the August WASDE sent the market from the nearby contract close of $4.1025 on August 9th to $3.59 on August 14th. Corn falls and feeders fall. That’s a new market relationship!
Markets may react to events. Until recently, markets were created by humans making buying and selling decisions. Unfortunately, those activities in the futures market and the stock market that used to be performed by humans are being replaced by computer algorithms.
Between these algorithms and funds trading, market dynamics have changed dramatically. Is this good? Part of the answer to that question I think can draw on market activity the week of August 15, 2019. Food for thought!