Beef packers have market leverage for now

Livestock Outlook: Kansas fire hampers U.S. beef packing capacity.

 

Lee Schulz, BEEF Magazine 

Sep 19, 2019

 

Schulz is the Iowa State University Extension livestock economist

 

For decades, the U.S. beef industry has been turning out more pounds of beef per animal in the herd. And for decades, the packing industry operated on squeaky-tight margins because the industry had too much slaughter capacity for the number of animals needed to meet demand for beef.

 

Several beef packing plants were shuttered or scaled down in the 2000s and early 2010s. Producers launched the expansion phase of the current cattle cycle in 2014. Excess shackle space no longer exists. The current tight labor supply also means operational capacity is smaller than physical capacity. On Aug. 9, a fire took down Tyson Foods’ beef packing facility in Holcomb, Kan., which threw an entirely new wrench into the market.

 

The Holcomb plant handled about 5% to 6% of all U.S. cattle slaughter. The cattle slaughtered were almost all fed cattle. Taking that much capacity offline overnight provides an interesting case study in both the national and regional cattle price discovery and price determination processes. Those impacts are considerably different than they would have been back when the industry had excess shackle space.

 

Price discovery vs. determination

 

Price determination is the interaction of the broad forces of supply and demand, which determine the market price level. Price discovery is the process of buyers and sellers arriving at a transaction price for a given quality and quantity of a product at a given time and place.

 

If you’re thinking a basis relationship, you’re right. Futures provide a price determination mechanism for the overall market — so do the national or regional average cash prices. A host of local conditions help discover local prices. Those conditions vary from location to location.

 

So far in 2019, supply-and-demand price determination signals are rather positive. Through July (the most current data available at the time of this writing), commercial beef production was up 1.1% compared to the first seven months of 2018.

 

The 5-Area average negotiated live FOB fed cattle prices (USDA AMS LM_CT180 report) had also been higher by 0.7%, or 84 cents per cwt. Through July, all fresh retail beef prices were 9 cents per pound, or 1.5% higher compared to the same period last year. Willingness of consumers to pay more for beef, even though more beef is available, reflects solid retail demand.

 

Beef exports have been relatively strong, too. Through July, beef plus beef variety meat exports were down 1.6% from a year ago in volume, but were only down fractionally from 2018’s record value pace. Export volume was up 1.1% year over year in July, while value was still only slightly lower.

 

Price ratio to capacity matters ...

 

Rising slaughter creates a squeeze ...

 

Local conditions help determine prices ...

 

Packers seek to operate efficiently ...

 

more, including charts

https://www.beefmagazine.com/beef/beef-packers-have-market-leverage-now