Burning Up the Market

by Kayla Sargent

When a cattleman hears barn burner, it’s generally regarded as great market news.  But in a literal sense, as in the case of the Tyson plant fire where an estimated six percent of the nation’s fed cattle packing capacity came to a halt, the effects on the market can be devastating.  On the evening of August 9, Tyson Foods’ Finney County beef plant in Holcomb, Kansas was partly destroyed by a fire in the box shop, seizing operations.  The next two trading days saw cattle prices limit down.

“The market panicked, and so did everyone participating within its constraints.  Fat cattle the following week traded $5-6 lower, at $1.05 – 1.07, calf prices at sale barns were around $10 lower, and country buyers were no where to be found in getting a fall contract for calves,”  ShayLe Hildebrand, Cattle Market News, said.

While producers were certainly feeling the affects of the fire, market vulnerability caused packer margins to skyrocket.

“Packers margins jumped from around $250/head/day to nearly double. Today, feeders would be overjoyed with profits at a fraction of the price that packers are making,” Hildebrand explained.  “And not only did the packers sock it to the feeder and the cow-calf guys, they also played the retail sector.  Boxed beef prices jumped $22, and the choice/select spread is at $25.45.”

While Tyson has plans to return the plant to full operations “as quickly as possible” it may be a long process.  Tyson Fresh Meat Division President Steven Stouffer told media in Garden City it will be a “matter of months, not weeks, but there is no specific timeline at this point.”

The Tyson plant processed roughly 6,000 fed cattle per day.  Over the course of a five-day work week, the national packing capacity will be down 30,000 head if the production is not shifted elsewhere, CattleFax analysts said.

In the meantime, shifting fed cattle supply to other plants in the region, including Kansas, Texas, Colorado, Nebraska, and Iowa means those plants may need to amp up production by 8 to 8.5 percent, or 3.3 hours per week — a tough feat due to current infrastructure — according to a CattleFax analysis.  Half of the available plants in the nation are already running at full capacity on Saturdays.

The loss of the packing capacity was not reflected in slaughter reports as expected the week after the fire.

“The biggest gut punch of all was when the slaughter figures came out for the week following the fire and 9,000 more head of cattle were processed than the week before the fire,” Hildebrand said.  “You don’t have to explain the distraught facts to any cattlemen.  With the hard winter we had calving, followed by the wet spring and strenuous flooding, if anything, cattlemen expected a little bump in the market because numbers were expected to be down.”

“The historical significance of this event has the potential to be remembered like other major challenges endured by the beef industry,” CattleFax said.  “The level of price correction that could come in the U.S. cattle market may be significant as cattle producers will need to incentivize existing packers to increase the utilization of more limited shackle space.”

The CattleFax analysis said, to make matters worse, cattle supply is at record highs.  As of July 1, a record large 11.5 million head are in feed yards with over 1,000 head capacity.  In Kansas alone, total cattle on feed is at 2.4 million, 21 percent of the nation’s total.

“Fed cattle inventories remain larger than last year,” CattleFax explained.  “This remains the biggest challenge.  The last three months of fed slaughter had a weekly average pace of 538,000 head/week.”

The potential market influence to follow the fire “cannot be understated,” the CattleFax analysis summarized.  It noted that the cattle feeding segment will “lose currentness during the next several months.”  All cattle classes could see more volatility “than originally thought as a result of this event.”  Feeders are expected to lose market leverage, “resulting in lower fed cattle prices and weaker demand for feeder cattle and calves.”  And finally, an already thin negotiated cash trade is expected to get smaller “in the near term.”

Nebraska Cattlemen President Mike Drinnin is calling on Tyson and other packers to be transparent and publish production plans in “hopes to minimize uncertainties and help stabilize markets.”

“We feel this is critical to our members, especially with the difficult year we have had.  Producers should not have to endure the total cost of this unfortunate fire in Holcomb.  The longer uncertainties are allowed to linger, the more costly it will become for all segments of our industry — all of whom have already been shaken by extremely devastating weather events,” Drinnin said.

On a positive note, he added that consumer demand for beef remains strong both domestically and in foreign markets.  Drinnin said he would remain in contact with Tyson and representatives in Washington D.C. to make them aware of the situation and the implications it could have on producers.

National Cattlemen’s Beef Association (NCBA) President Jennifer Houston said the organization is taking steps to “minimize the inevitable economic disruption and help the industry recover as quickly as possible.”  NCBA has reached out to the National Economic Council to ask for regulatory flexibility; the Commodity Futures Trading Commission and the Packers and Stockyards Division to “keep an eye on the market” and “identify any market participant who might try to illegally capitalize from the market situation”; the U.S. Department of Transportation to provide Hours of Service waivers; and Secretary Perdue and USDA leadership to provide APHIS and FSIS inspectors flexibility.  NCBA followed up on all contacts with phone calls and official letters of request.

The Tyson plant employs around 3,300 workers, all of whom will be paid weekly until production resumes.  About 1,200 employees were on shift when the fire occurred, but no injuries were reported.  Stouffer said the fire was likely caused by a welding spark and although the damaged area is small in comparison to the entire plant, it is a critical step in the process.  Structural work will begin immediately.


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