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Market reaction fits expectations

Marketing cattle
Economics suggest market reaction following the Tyson fire was in line with the market shock that temporarily shuttered 5-6% of fed cattle capacity.

Plenty of folks—from cattle producers to their elected representatives—continue to question how markets reacted following the Tyson beef plant fire in August. In the meantime, several economists explain market reaction was in line with what they would expect from such a market shock.

“It should not be surprising that we had a large increase in cutout prices and a notable decline in fed cattle prices,” said Glynn Tonsor, agricultural economist at Kansas State University (KSU), at last week’s KSU Beef Stocker Field Day. 

For fed cattle, Tonsor explains the loss of 5-6% of the nation’s fed cattle capacity decreased the derived demand for fed cattle, as packer costs increased to accommodate the supply disruption. At the other end, he says relatively low beef cold storage supplies ahead of the fire added to uncertainty for beef buyers.

“With fresh beef production suddenly decreased, boxed beef prices rose sharply to ration a suddenly limited supply,” explains Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. “With less supply available, the market uses higher prices to determine how limited beef supplies will be allocated.”

That’s a common market reaction, he says. “When a freeze hits Florida, orange juice prices begin to rise immediately, not because there is an immediate shortage of juice but to make sure that the current supply continues to be available over time. Markets will never tell a consumer that they cannot have a product but prices will rise enough to convince some consumers not to consume as much of the product at this time.”

Likewise, Jayson Lusk distinguished professor and head of the department of agricultural economics at Purdue University, says the observed reduction in cattle prices and increase in wholesale beef prices were consistent with a model of competitive outcomes.

“An unexpected reduction in processing capacity reduces demand for cattle, thereby depressing cattle prices. The need to bring in additional labor to increase Saturday processing and temporarily repurposing cow plants for steers and heifers involves additional costs that pushed up the price of wholesale beef. 

“These price dynamics are not surprising and are generally what would be expected from the fundamental workings of supply and demand,” Lusk explained in prepared testimony presented this week to the U.S. Senate Committee on Agriculture, Nutrition and Forestry.  

Although prices are recovering from the market shock, Tonsor points out they were under pressure before the fire. That means there may not be much of a price bump when capacity returns—various reports suggest the Tyson facility will be up and running by the beginning of next year.

“Re-opening the plant will enable the industry to return to a more normal sense of processing, which in turn would remove one of the many sources of uncertainty weighing on markets,” Tonsor says (see “Cattle Economics” in October BEEF). “In that sense, the plant can't reopen soon enough. That said, broader market developments before early August reflected ongoing pressure on feeder cattle prices that are not envisioned to change drastically when the Holcomb facility returns to full operation.”

USDA will likely conclude its investigation into markets following the fire early next year.

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