Beef Cutout Prices: Widely Reported, Yet Wildly Misunderstood, pg. 2
“The cutout market reflects both beef supply and demand forces on a large set of individual products, which are aggregated to individual primal and ultimately composite cutout values by USDA’s Agricultural Marketing Service (AMS),” says Glynn Tonsor, Extension livestock market economist at Kansas State University.
The shuttered Tyson plant represents 6% of overall U.S. beef packing capacity, and packers scrambled to make up for that loss. In the week following the fire, the Monday through Friday yearling slaughter was down more than 22,000 head, but a large Saturday kill resulted in total weekly slaughter down just 1,000 head from the pre-fire week. The second week after the fire — again due to a large Saturday kill — weekly slaughter actually increased 2,423 head. The third week after the fire, slaughter including Saturday was just 175 head less than the week before the fire. Keeping slaughter levels high was critical to market recovery.
Peel says the fire caused an “immediate loss of fresh beef product into wholesale markets which left a variety of buyers scrambling to find product and for Tyson to meet contractual obligations.”
Following the Tyson fire, Tonsor says “the subsequent changes in the packing-processing sector involved higher operating costs which, besides pressuring cattle prices, elevated asking prices for wholesale beef items. Meanwhile,cold storage stocks were comparatively low, given the point in the current cattle cycle, and beef demand was strong. These factors are supportive of beef buyers increasing bids for wholesale beef. Combined, these bid-ask forces in mid-August led to notable increases in cutout values.”
As a result, spot boxed beef prices jumped sharply the first week after the fire and peaked the second week after the fire.
“Choice boxed beef cutout values increased from a weekly average $216.04 per cwt the week before the fire to a peak of $239.87 per cwt the week after the fire,” Peel says. By the last week of September, Choice boxed beef prices dropped to $214.51 per cwt. A month after the fire, noticeable effects of the fire were mostly absent from boxed beef markets.
Much like markets for cash fed cattle, Choice boxed beef prices are derived through a negotiated bid-and-ask market between packers and retailers, and is covered under Mandatory Price Reporting. The reports, issued daily and weekly by AMS, cover the most commonly produced nondairy bred, steer and heifer sourced individual beef cuts.
In describing this report, AMS says it has two major sections, “the spot market and the comprehensive market. The spot market section is limited to negotiated type sales that deliver within 21 days to domestic locations. The product is unbranded Choice and unbranded Select. Aged or frozen product is excluded.”
By early November, cattle markets had rallied, and the effects of the fire had passed, even as the Finney County plant remained idle. Certainly, impacts and additional costs are still being incurred by both buyers and sellers of both cattle and beef.
“Some people have been surprised and frustrated with market reactions after the fire,” Peel says. “But the type and duration of price behavior are exactly what is predicted by market economics.”
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