September 28, 2020
Beef and cattle prices reacted the way they should have in the wake of the Tyson plant fire in Kansas last summer, and following the massive supply and demand shock imposed by the pandemic.
That’s the bottom-line interpretation of the price investigation completed by the USDA Agricultural Marketing Service (AMS).
Sudden and historically wide price spreads between cash fed cattle prices and wholesale beef values after the fire prompted the investigation.
Then came COVID-19 and even wider price spreads, so USDA added that to the original investigation.
Up front, keep in mind that the USDA Boxed Beef and Fed Cattle Price Spread Investigation Report does not examine potential violations of the Packers and Stockyards Act.
“Findings thus far do not preclude the possibility that individual entities or groups of entities violated the Packers and Stockyards Act during the aftermath of the Tyson Holcomb fire and the COVID-19 pandemic,” according to the USDA report, released July 22
“The investigation into potential violations under the Packers and Stockyards Act is continuing.”
Instead, the report provides an overview of market conditions and prices before, during and after both “black swan” events.
Massive price gyrations
First, the price trajectory after the fire.
The weekly average Choice boxed beef cutout value (CBCV) the week of the fire (the fire occurred Aug. 9, 2019) was $216.04 per cwt. The first week after the fire, it increased 6.7% to $230.43.
Ultimately, the CBCV rose to $239.87 the second week after the fire, before beginning to decline to $212.58 the first week of October.
The weekly average fed cattle negotiated cash dressed price during the week leading up to the fire was $180 per cwt. The price declined 6% to $169.81 during the first week after the fire, but increased the second week after the fire to $172.20 (up 2%).
Ultimately, negotiated fed cattle prices declined to a low point of $159.06 per cwt the week ending Sept. 14.
So, the spread between the dressed cattle price and CBCV was $36.03 per cwt in the week leading up to the fire. The spread increased 68% to $60.62 the first week after the fire. It was $67.17 the second week after the fire.
At the time, that was the largest spread since the inception of mandatory price reporting in 2001. After the third postfire week, the spread narrowed to $41.77, a 38% decrease from its postfire high.
In his analysis of the USDA report, David Juday of the Juday Group notes the focus by many was on apparent gross margins for beef packers.
“This spread is a metric of just two factors: live cattle prices and wholesale beef prices. It does not reflect all costs incurred in harvesting and processing cattle into beef. The cattle-to-beef margin excludes other operating costs, such as labor costs,” Juday explains.
More importantly, he says, the cattle-to-beef margin ignores fixed costs.
“Fixed costs constitute the largest percentage of overhead for meat packers. Overall, per-head margins on processing cattle rise dramatically as slaughter throughput is decreased,” Juday says.
“Fixed costs must be spread out across the volume of cattle processed. Reducing the number of cattle processed by up to one-third, or idling a plant for several days, adds significantly to the per-head cost of slaughter and processing.”
Then came COVID-19
Postfire price reactions pale compared to those associated with the pandemic.
First, there was the demand shock as beef demand switched essentially overnight and almost entirely to retail, and away from food service, as consumers sheltered in place.
The CBCV increased about 23% from the middle of March ($207 per cwt) to the beginning of April ($255). During the same period, average dressed fed cattle prices increased from $173 per cwt to $189.
From mid-March to the beginning of April, the spread increased by approximately 94%, from about $34 per cwt to $66. The spread averaged just under $21 per cwt during 2016-18.
Then came disruptions to packing capacity, beginning in late March and peaking at the end of April, as workers were infected and plants slowed or closed altogether, significantly reducing both beef production and packer demand for fed cattle.
At the same time, there was another surge in retail demand by consumers fearful of shortages.
Weekly average CBCV increased about 80%, from about $255 per cwt at the beginning of April to about $459 by the second week of May. From the beginning of April to the start of May, dressed fed cattle prices declined 18% from $189 per cwt to $154.
From the beginning of April to the third week in May, the spread increased from approximately $66 per cwt to just over $279, ballooning 323%.
From the second week of May to the first week of June, Choice boxed beef cutout value decreased from $459 per cwt to $298. Dressed fed cattle prices increased from approximately $154 the last week of April to $179 the first week of June.
During the first week of June, the spread narrowed to about $119, down from $279 the first two weeks of May.
“This is a decrease of approximately 57%, but the spread is still high by historical standards,” AMS analysts say. “It is too early to determine if this trend will continue, as uncertainty persists over the recovery of the supply situation at beef plants and the recovery of food service demand amid continued COVID-19 concerns and any continued effects.”
Economic pain, but no surprises
“Record-high meat prices are not a surprise,” says Stephen Koontz, agricultural economist at Colorado State University, reflecting on COVID-19 impacts specifically, in his analysis titled “Economic Reasons for What Was Observed in Fed Cattle and Beef Markets During the Spring of 2020.”
“The grocery store supply chain was emptied during the closures of local economies and then had difficulty catching up,” Koontz explains.
“Further, prices associated with specific cuts that consumers typically prepare at home were the highest.
“Prices of cuts sold at restaurants initially dropped to record lows and then rallied as consumers made substitutions and began purchasing cuts they did not buy typically. However, all rallied as total beef supplies diminished with closures and partial operations.”
Likewise, Koontz says the precipitous decline in cattle prices was not surprising.
“If packers cannot run, or cannot run at typical throughput levels — especially if animal supplies are abundant — then the marginal value of that last group of animals that is not sold is close to zero. And the last pen or truckload or group of animals is a perfect substitute for the first,” Koontz says.
“It is the marginal value of the last product that sets the market. This point is critical. In fact, that is what is communicated by economists when supply and demand curves are drawn. The equilibrium quantity and price are what is traded at the lowest marginal value to buyers and the highest marginal value to sellers.”
That gets at another point emphasized in the USDA report.
AMS analysts point out the detailed summary of market conditions and price reactions are a single component of the broader industry discussion surrounding beef packing concentration and price discovery.
“At the core of many of these discussions is the desire by many market participants for improved price discovery, reinvigorated competition and a more transparent relationship between the prices for live cattle and the resulting products,” according to the report.
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