USDA investigation confirms cattle and beef prices reacted as expected to packing capacity and demand disruption.
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.