What Sparked Cattle Markets’ Explosive Reaction to Tyson Plant Fire

USFR-FJR
The fire at a Tyson beef packing plant in August sparked an explosive reaction in the markets, but was it basic economics that drove prices or something else? Three economists weight in. ( Farm Journal )

One fire lit up the cattle markets in August, proving that a single event can have an explosive impact. Two months after the fire subsided, the cattle industry is still trying to wrap its head around the fact that one fire, at one beef packing plant in Kansas, could shake up the market the way it did.

“There's been lots of emotion and lots of adjustment in the market,” says agricultural economist Glynn Tonsor of Kansas State University.

“From my perspective, it didn't reveal as much as some people think it did,” says Jayson Lusk, agricultural economics at Purdue University. “Certainly, there's concentration in the packing industry and there's some legitimate concerns there, but a lot of what we saw happen, frankly, was the fundamental workings of supply and demand.”

The Tyson beef processing plant in Holcomb, Kan., processed 6,000 head per day before the fire. That processing capacity accounts for 6%of the total U.S. fed cattle capacity.

“The boxed beef market shot up, and then has quickly retreated back to previous levels, at least to where we would be this time of the year,” explains Derrel Peel, Oklahoma State University livestock specialist. “Effects from the fire are pretty much out of that market.”

“In the short-term, this [fire] was adverse for the margins at the feedlot level,” Tonsor says. “You can't ignore that. And likewise, in the short-term, it was good for margins at the package level, certainly gross margins improvement and most likely net margins with that. However, we don't have cost data analysis to get real precise on the margins, but that's a pretty obvious impact from this.”

The fire – and market reaction since – sparked major controversy.

“There was a lot of uncertainty on just how much beef was lost, how extensive the damage was, how long the plant would be closed,” Tonsor says. “We didn't answer those questions hours after the fire, it took days and weeks after the event.”

While some of the market impact has sizzled out, Peel says the fed cattle market is currently being impacted the most, due to a squeeze on packing capacity. He says that’s creating challenges to keep moving fed cattle through available supplies in a timely way; therefore, the market is recovering slowly.

As economists comb through the impacts of the fire, Lusk says while the initial reaction was knee-jerk, it was basic fundamentals that originally drove prices.

“When you reduce processing capacity, that reduces demand for cattle and that drove down cattle prices,” Lusk says. “Then we had extra costs in the system, because we had to bring in extra workers on Saturdays and conversions of plants that pushed up wholesale prices. While margins increased, it was a response to the underlying market conditions.”

The fundamentals caused cash cattle prices to crash, while packers saw better margins. The market reaction was knee-jerk, driving cash cattle prices lower.   

“It certainly has influenced profitability in the short-term for different sectors, and probably the most obvious two sectors are the packing sector and the feedlot sector,” says Tonsor.

The market reaction and lower cash cattle prices drove anger among cattle producers, with a new social media campaign called #faircattlemarkets. The campaign is pushing for change.

“This is a result of all the anger in the countryside right now among cattle producers because of the market and prices,” says Colin Woodall, newly named CEO of the National Cattlemen’s Beef Association (NCBA). “They felt that this was an opportunity to try to join forces and talk about those concerns.”

The push for change went beyond social media in October, with cattle producers from across the country meeting in Omaha, Neb. The ranchers held a rally to voice concerns while outlining what they want to see changed. It was led by groups like R-CALF USA and Organization for Competitive Markets (OCM). However, NCBA didn’t attend the meeting, sparking anger from cattle producers in the room.

“The reason why [NCBA didn’t attend] is because this is being pushed by a group called the Organization for Competitive Markets (OCM),” Woodall says. “OCM is actually connected to the Humane Society of the United States (HSUS). While the anger in the countryside is very real, the fact that OCM is involved does not mean that this is going to be good for cattle producers.”

Woodall says NCBA is hearing cattle producers’ frustrations post-fire. He says those voices were already being heard by the current administration, as NCBA took those concerns straight to the White House and USDA.

“Fortunately, that anger has been heard not only by us, but also by Secretary Purdue,” Woodall says. “Secretary Purdue has launched an investigation and the whole goal of this investigation is to understand what transpired, what happened and actually give us some facts and analysis. I think once that is done, it will give all of us in the industry the opportunity to try to figure out what's next.”

Woodall says the investigation launched will hopefully reveal some answers, including if there was collusion among meat packers, or if there were other factors driving prices in the marketplace.

“There are a lot of angry feelings about what transpired, but today, we haven't received any definitive answers,” says Woodall. “We believe that's what the USDA investigation will provide us.”

As prices faded after the fire, there was also a renewed push for mandatory Country of Original Labeling (COOL), another effort NCBA says it doesn’t support.

“Every time we see a dip in the market, folks bring back country of origin labeling and claim that if we had a country of origin labeling, we wouldn't have this problem,” Woodall says. “It was the law of the land for six and a half years and there is not a credible economist out there who will point to COOL and say that it was beneficial to cattle producers.”

As the market fuel from the fire continues to taper off, and equilibrium sets in, Peel thinks cattle producers will reverse again and start trending lower.

“I suspect the fall run will pressure prices,” he adds. “With wheat pasture demand good, we actually may see sideways trade to slightly stronger prices here for another two or three weeks, before we get into bigger numbers of cattle.”

Comments
Submitted by Brad on Thu, 10/10/2019 - 19:02

This market is a total RIP off. How much grant money does mr. Lusk and mr. Peel get from Tyson and the other big 3?

Submitted by Riley Robbins on Thu, 10/10/2019 - 22:06

I find it funny that none of NCBA's economist can find country of origin labelling of beef beneficial to producers. When the big four packers admit that because we don't have mcool they can import beef cheaper commingle it with our USA beef slap a USDA sticker on it and sell it. They admit this lowers their demand to buy USA beef and increases their profits. With our consumers assuming USDA means USA originated. Ask your local consumers if they would like to know where their meat comes from. There has been several studies showing USA consumers want to know the origin of their meat. NCBA is supposed to be helping producers sell their product and promoting beef that's why they get our check off dollars. What better way to do this than let consumers pay for meat they know is originated in the USA! I am proud of the cattle I produce and try my hardest to make a safe healthy product for consumers. I firmly believe that today with consumers concerned about things like hormones, antibiotics, withdraw periods, feed additives and the proper care and handling of cattle they deserve to know the origin of the product they are paying for and consuming.