Market Angst Boils

03:27PM Oct 17, 2019
Markets tumbled in August.
( Scott Stebner )

Editor's note: The following article was written in late September for the October 2019 edition of Drovers.

Mounting frustration was evident in cattle country six weeks after a fire at Tyson’s Finney County packing facility was extinguished. The Aug. 9 blaze shuttered the plant until January of next year, and left packers and feedyards scrambling to make up for the 6% loss in weekly cattle slaughter.

The loss of slaughter capacity at a time of peak cattle supplies created an atmosphere of uncertainty and rocked the cattle markets the following week. CME Live Cattle futures locked limit down the following Monday, with carryover selling in the following days. Cash cattle prices, trading at $111 per cwt the day of the fire, retreated to a low of $98 over the ensuing month. That meant fed steers were fetching roughly $200 per head less than before the fire. Declines in the feeder cattle market were similar.

As cash cattle prices declined, packer margins grew rapidly. The Choice beef cutout price rallied 10% within two weeks, from $216 per cwt the day of the fire to $240 per cwt. Average packer profit margins before the fire were estimated at $300 to $350 per head and surged approximately $150 per head higher in the two weeks following.

“There is something really wrong with that picture,” says Joe Goggins, owner of Public Auction Yards (PAYS), Billings, Mont.

“We as cow-calf producers and independent cattle feeders own these cattle anywhere from 120 to 210 to 365 days a year. We take all of the risk, we fight all of the  elements, we battle the banker to try to stay financed, and for what?”

To draw attention to the plight of cattlemen, Western Ag Reporter, Billings, Mont., launched a Twitter campaign  asking President Donald Trump  for assistance in “rebalancing the cattle markets.”

Goggins’ brother John is publisher of Western Ag Reporter, and they are sons of the late Pat Goggins, who owned PAYS and Western Ag Reporter along with ranching interests in Montana.

The Goggins family continue to operate those enterprises.

“I’m not against the packers,” Goggins told Drovers. “But we need some fairness in our markets.”

He notes industry data shows cow-calf operations have made $8 over the cost of production the past 20 years, while independent feedlot operations have lost an average of $15 per head, excluding any carcass premiums or hedging activity.

“What the packers have done since the Tyson plant fire in my mind is criminal,” Goggins says. “You can call it unjust enrichment, pillaging, unfair business practices, whatever; I call it criminal.”

Seeking relief and a change in attitude, Goggins spearheaded a campaign with the intent of garnering Trump’s attention. He believes the best way to reach the president is via Twitter. On Sept. 23, Western Ag Reporter launched its #FairCattleMarkets campaign in an effort to make cow-calf and feedlot operators’ voices heard.

Cattlemen had already gained the attention of U.S. Secretary of Agriculture Sonny Perdue who, in late August, directed USDA’s Packers and Stockyards Division to launch an “investigation into recent beef pricing margins to determine if there is any evidence of price manipulation, collusion, restrictions of competition or other unfair practices.”

Perdue’s request came as part of USDA’s “continued efforts to monitor the impact of the fire at the beef processing facility in Holcomb, Kan. If any unfair practices are detected, we will take quick enforcement action. USDA remains in close communication with plant management and other stakeholders to understand the fire’s impact to industry,” the statement from Perdue says.

Even with a sense of urgency that cattlemen have conveyed to Secretary Purdue, results of the investigation are not likely until early next year.

Colin Woodall, the new CEO of the National Cattlemen’s Beef Association, says his group has asked USDA to move quickly.

“More importantly, what we’re hearing from USDA is that they want to be thorough, and thorough does not always necessarily mean fast,” he says. “But, I think everybody is listening, and everybody in the industry would prefer there to be a thorough investigation, so we can truly understand what transpired and try to finally answer everybody’s questions.”

The market’s abrupt decline following the fire encouraged producers to vent their frustrations, which Woodall and other industry leaders acknowledge.

“We understand that there is a high level of emotion, but we also need to make sure that we’re sticking to the facts,” Woodall says. “We’re trying to get the facts, and that’s why we’re supporting this USDA investigation, so that we can get all of the facts on the table as quickly as possible so everyone can understand what happened.”

While the USDA investigation unfolds, some data points already discount ideas that the markets were manipulated.

“We need to understand that some of the numbers thrown out in the aftermath of the fire are a little careless,” says Derrell Peel, Oklahoma State University Extension economist.

Specifically, while feedyard losses obviously increased due to sudden declines in the cash price, Peel says packer margins didn’t automatically increase proportionately.

“We can’t use the spike in beef prices and the decline in cattle prices in the two weeks after the fire to determine packer profits,” Peel says. “That’s because packers have 30% to 60% of their meat presold. They didn’t sell the majority of their meat in the two weeks after the fire at those high prices.”

The chief concern created by the fire was diminished industry slaughter capacity. Sterling Marketing president John Nalivka says the packing industry was already running at about 91% of its weekly slaughter capacity, a historically high level. Removing Tyson’s Finney County plant means the industry was operating at 96% or 97% of capacity.

“Another point that gets overlooked is that the industry has covered our slaughter needs pretty well given that we lost so much capacity,” Peel says. “The industry did a lot of things to make it look easy from the outside, but it’s not.”

Specifically, cattle are shipped greater distances to other packing plants, and in some cases meat is being shipped to retailers from greater distances. Saturday kills have made up most of the difference in packing capacity, Peels says, “but those are not as cheap as Monday through Friday kills.”

Peel says he won’t argue packers are making more per head after the fire, but he says the industry should remember, “they’re the ones that have to fix the problem.”