Packer Price Manipulation or Favorable Market Conditions?
The Cattle Range
The amount of beef being processed has dropped due to increasing COVID-19 problems at several packing plants, resulting in a buildup of ready-for-slaughter cattle. Normally, this would result in higher beef prices and lower cattle prices.
However, over 50% of U.S. beef consumption has been going through foodservice but foodservice sales are currently down from 45% to 65% and sales will start to increase only when restaurants reopen and unemployment begins to recede. And even though recent beef export shipments have been strong, new sales data shows slumping export demand. Combine this with the likelihood that households will quit stockpiling beef and other meats in their freezers and revert to normal buying habits later this spring, this could become a scenario for lower prices for both beef and cattle in the foreseeable future.
Hopefully, the COVID-19 aspects of the problem are short-term. But this illustrates that the underlying long-term problem is current packing capacity is barely sufficient for the current herd size and provides the packers substantial leverage in procuring cattle. Any processing slowdown, regardless of the reason, results in a backup of cattle and lower prices.
Reasonable and stable profitability for the cattle industry will occur only when packing capacity increases or the size of the cow herd decreases. Construction of additional packing capacity is unlikely because operating at near 100% capacity is very efficient and profitable for the packers. Conversely, increasing processing capacity would have the opposite effect on cattle prices that the fire at the Tyson plant in Kansas did, which was sharply lower cattle prices. In a capitalist economy, businesses act in their best interests, and clearly it would not be in the packing industry’s best interest to increase packing capacity when, under normal conditions, they can meet current beef demand with existing facilities.
On Friday, March 13, the Choice Boxed Beef Cutout was at 208.14 per cwt. Fueled by COVID-19 panic beef purchases over that weekend, the cutout closed $15 higher on Monday, March 16 and topped out at $257.32 per cwt. on March 23rd. After that high-point, prices have retreated and were at $223.93 on Friday, April 10th. This spike in beef sales was not an indication of a long-term increase in beef demand or consumption, but concerned consumers stocking-up on beef and other staples.
During this same time period, slaughter cattle have traded from $110 per cwt. on March 13th to a high of $120 from March 25th thru April 1st and then down to $105 by April 10th. This market action has resulted in numerous requests for an investigation and the USDA has announced they will look into the ‘divergence between box and live beef prices’.
An investigation will likely find that the packing industry is not manipulating the market, but due to the current number of cattle ready for slaughter, are simply able to buy sufficient numbers of cattle from willing buyers at the price offered, whether bought at an auction or on a negotiated, grid, or formula basis. Packers cannot be forced to pay more than the current market price for cattle or to increase processing capacity. Higher cattle prices are contingent upon increased beef demand or fewer cattle offered for sale and plant expansion will occur only if packers are incentivized to do so by a significant increase in demand for beef and a corresponding increase in the supply of cattle.
In the past 5 years, 750 lb. feeder steers have sold for over $225 per cwt., slaughter steers have brought $170 per cwt. and cattle feeders have made in excess of $350 per head, and at times, the packers have lost over $200 per head. Feedyard close-outs for unhedged slaughter steers sold last week showed a loss of about $165 per head while their hedged counterparts made around $80 per head. In a free-market economy, there are always winners and losers… But in an economy with price controls or governmental intervention, there may not be many losers, but no one prospers.
The ‘Law of Supply & Demand’ dictates that in the absence of increased demand, higher cattle prices can only be obtained by decreasing the supply. This is likely already underway with less efficient cattle producers exiting the industry.