Livestock were sharply lower early Friday with grains higher.
Cattle Futures Crash on Tyson Plant Closure
Cattle futures were sharply lower reacting to the news Tyson is closing its Joslin, Ill. beef plant immediately and will be selling its Pasco, WA plant. Plus its case ready plant in Eagle Mountain, UT will be shuttering. The company may add a second shift to its Amarillo, TX plant.
Joe Kooima with Kooima Kooima Varilek says the market had been pricing some of this fear in the last couple of sessions with various rumors hitting the market.
He says the market was pricing in the news on Friday morning in similar fashion to the other plant closures this year including Lexingon, Neb.
“We’ve had two other plant closures too and that those last times it seemed to have that first five minute fallout in the futures market then we actually rallied up and out of there with that news sometimes you can bottom the market on the on the worst news but this one probably hits home a little bit differently,” he says.
Losing 5,000 Head Packer Capacity
The two kill plants added together represent about 5,000 head of slaughter capacity if they were fully operation but he says the last six to eight month those plants have been running under those totals.
“So it’s not like we’re also going to boom out of 5,000 shackle spaces. It’s, I don’t know, 3,800 or something like that if they’re not at full
capacity.”
While there was talk of moving cattle to Amarillo, TX and adding a second shift Kooima was not confident that would happen.
“I think there’s been a story many years ago of a plant closure in Iowa where they kind of promised a second shift somewhere else and it never happened so I don’t know if I’m going to hold on to that. They’ve shuffled enough cattle around that this won’t impact the industry I can’t get on board with that at all and if the cattle come available maybe it’s seven days after we open the border August 24 and we have bigger cattle coming out of Mexico that may be a theory,” he adds.
This Time is Different
Kooima says this plant closure seems different than the last though because it represents a structural business change in the industry.
“We saw our infrastructure just change with the border closing. It’s impacted closing of plants. This one just feels different for the fact that you have a business move, infrastructure change in Tyson, where they got some new leadership in there and just completely flipped over some tables there. So the worry to me, to us here would be, is there any follow-up with another company?”
He says the packers want their margins back and may need to do some business infrastructure changes to accomplish that.
“Because what we witnessed here yesterday and today I mean the kills are going to be lighte, boxes they’re going to go higher and packers just might pay whatever they want for cash cattle. It’s an awesome boom to get margins back and in a few days status,” he says.
But the long-term effect is you could have another packer following suit.
Shackle Space
So what does this means for overall shackle space since packer capacity is already under utilized?
Kooima says, “It doesn’t help that situation at all. You know, it’s a fine line when we have too many cattle or not enough cattle and too many cattle. Even with the tight supplies that we have, even killing eight to 10% less than last year with losing these shackle spaces, it’s that supply issue that’s more bearish than anything but yeah we’re still probably gonna have tight numbers and you know for the next 12 months but we just had the status quo completely flip on us here recent recently and the packers kind of have their control right now.”
producers have lost leverage that was pretty evident in the cash market this week wasn’t it yeah
Packers Use Leverage to Push Cash Lower
That packer leverage was evident this week with the lower cash market.
Kooima says after a higher week last week by $2 at mostly $235, some to $236, there was optimism for higher prices and at the start of the week.
The market started out at $234 for a few at the start of the week but by Tuesday into Wednesday that changed.
“Now you just have a raunchy cash market there’s some $230 yesterday and some of these meat bids aren’t fun either but you know the packers kind of smelled a little bit of the blood in the water,” he explains.
USDA reported cash at $228 to $230 in the North, $362 to $365 dressed and the South has seen very little movement except for private source reports of $228.
How Low Will Cattle Futures Fall?
So the market was already lower the last two days seemingly pricing in some of the bearish news but how much lower will prices fall?
Will the market test the lows from the day of Mexican border reopening was announced?
Kooima says he’s afraid that may be the case. “Sometimes those double bottoms are a little bit too obvious of a spot to hold on because we all can see it on the charts and you can have sell stops below there by you know a few pennies or whatever and they get knocked out. So, I don’t know if I’m trusting that necessarily.”
Because it may take six to eight weeks to fully price in the impact beyond just the headlines.
“I think the headline that we saw come out late afternoon, we probably priced that in $4 lower yesterday, another $3 to $4 lower. That’s probably priced in here temporarily. However, that doesn’t mean that we’re over the hump here,” he adds.
Looking at the charts the last $12 to $14 rally in the fed market topped out last week and so this would be the third leg lower.
“So if we take like the first leg it’s like a $205, $206 type numbers for the your spot months not necessarily August but like October, December,” he concludes.
Hogs Lower With Cattle
Hog futures were sharply lower in sympathy with cattle, but lower cash and cutouts have also pressured the market.
How much downside risk is there?
Kooima says, “We’re kind of hanging on some lows, kind of the same chart action there and some of your deferreds where, yeah, I should hold here. It’s held a couple times in the past. I don’t know if I quite trusted, but yeah, we’re getting some follow through selling from the cattle. And when you have days of extreme in the cattle, then it doesn’t bode well for the hogs.”
August expires Friday leaving a huge premium to October but he says that doesn’t mean the October has to rally to where August went off the board.
“Historically you look at that and the market usually will struggle here for the next week and a half when October takes leadership and then it can kind of turn around to a certain degree but having these cutouts down every day and the cash is just stagnant again could mean October holds for a while to see if what kind of leadership it wants to take,” he explains.
Plus the numbers are not tightening fast enough to help either.
Grains Work on Higher Weekly Closes
The grain market was higher early Friday with help from weather and Black Sea export disruptions and the markets are working on hgiher weekly closes.
“The geopolitical stuff with Ukraine and Russia continues to blow up over there helping wheat out and if it can hang out here, it just feeds into the corn more specifically.”
But the WASDE was also helpful with the lower ending stocks for old and new crop and the yield cut.
“You know, 3% drop in yield is very significant. I mean, we can’t sit here and produce record crop after record crop after record crop without having some kind of a hiccup.”
This year started good but with dry conditions West and too much rain and storm damage East, plus a record hot July the crop is likely getting smaller he says.
“Chart-wise, the corn looks really good. We’re on our second leg higher. We held where we had to yesterday after rallying 20 cents on a
report day, give 10 cents back, close above, you know, $4.72, which is pretty significant. And this could be our second leg higher after, you know, potentially for the third leg higher,” he says.
