“Fire” is a word that strikes deep unease and at times fear into the hearts of many Americans. In northern California, tragic fires since late 2017 have claimed countless lives and caused billions of dollars of damage and destruction on a scale never seen before.
Industrial fires can also be devastating, and the meat processing industry has been fortunate to have avoided large fires for some years. The last big fire was on Dec. 26, 2000, when ConAgra Beef Co.’s Garden City, Kansas, beef plant was badly damaged. It never re-opened. On Aug. 9, Tyson Foods’ Holcomb, Kansas, beef processing plant was seriously damaged by a mid-evening fire. No one was injured, but the fire took the plant’s slaughtering operations out of action for the rest of the year. As of early September, further processing operations at the plant continued while logistics officials facilitated rerouting shipments of cattle to Tyson’s other slaughtering facilities.
The market consequences were immediate and continue to this day. The US beef industry has in the past endured weather and BSE-related market hiccups but has never experienced a “fire” market. The fire could not have occurred at a worse time and place. The Holcomb plant is one of seven US plants that can harvest 6,000 cattle per day. Only Tyson’s Dakota City, Nebraska, plant is larger at 7,000 head per day.
This meant the fire took out more than 30,000 head per week of capacity. The loss has most directly impacted cattle feeders on the Southern Plains, a region that runs from central Kansas south into the Texas Panhandle. Kansas had 110,000 more cattle on feed on Aug. 1 than a year earlier and Texas had 40,000 more on feed. That’s against a national inventory that was a record for the date, but up only 19,000 head compared to a year ago. Conversely, Nebraska had 140,000 fewer cattle on feed on Aug. 1 than last year.
The fire hit the very region that could least afford to lose any capacity. Had a fire put a large northern plant out of action, the overall market impact might have been much less. On the other hand, there still might have been a big selloff in live cattle futures regardless. In any event, the futures market grossly over-reacted and held its own fire sale of live cattle contracts.
This immediately forced cash prices sharply lower. The US Dept. of Agriculture’s (USDA) 5-area average prices the week after the fire fell $5.69 per cwt live and $11.28 per cwt dressed. Live prices inched higher the following week and dressed prices added several dollars. But prices fell back again the last week of the month, as packers were buying cattle for a holiday-shortened production week, and the first week of September.
Taking a closer look
In late August, Agriculture Secretary Sonny Perdue announced an investigation into beef pricing margins in the aftermath of the fire. Led by the Packers and Stockyards Division (PSD) of USDA, investigators were directed to look for evidence of price manipulation, collusion, restrictions of competition or unfair practices. Perdue said the agency was communicating closely with Tyson plant managers and stakeholders to gain a clear picture of the fire’s impact on the industry. “If any unfair practices are detected, we will take quick enforcement action,” he said.
The investigation was lauded by the National Cattlemen’s Beef Association (NCBA). “Today’s announcement by Secretary of Agriculture Sonny Perdue demonstrates the government’s understanding of the extreme strain placed on the cattle industry by the plant fire in Holcomb, Kansas,” said Jennifer Houston, NCBA president. “We encourage USDA to look at all aspects of the beef supply chain and to utilize internal and external expertise in this investigation.”
Meanwhile, packers raised their boxed beef prices dramatically after the fire and short-bought beef buyers were forced to pay those prices to cover their Labor Day needs. The weekly Choice cutout increased $15.54 per cwt in the two weeks after the fire, although it began to decline after the holiday.
The irony of the fire’s price impact is that Tyson moved swiftly to shift production to its other five plants and other packers increased their daily and Saturday slaughter levels. Tyson President and CEO Noel White on Sept. 4 said the fire had caused minimal volume losses to its overall beef production, adding that the only losses realized were related to the costs in transporting cattle to the other plants. Weekly and Saturday kill totals bore this out. The week after the fire saw a total of 653,282 head slaughtered, with 73,601 head on Saturday. The following week was 657,020 head and 75,119 head, respectively. These were by far the two largest Saturday kills of the year for a non-holiday week. The kill the last week of August was an estimated 644,000 head, the same number as the same week last year.
It is hard to reconcile these slaughter levels with the fact that cash live cattle prices fell nearly $7 per cwt in the three weeks after the fire. But the futures market recovered none of the ground it lost in the week after the fire and probably will not. In fact, it remained extremely negative. The early October live cattle contract closed at $97.87 per cwt on Sept. 5, down nearly $9 per cwt from Aug. 9.
Several other market factors have been in play. Cattle feeders with hedged cattle have been willing sellers as the basis between cash and futures prices has been extremely positive. Those with formula-priced marketing agreements with packers or who sell on forward contracts were also eager to get shackle space at packing plants. The result was that the sales volumes on the negotiated cash market were smaller than normal since the fire, raising concerns.
The big question going forward is whether packers have sufficient workers to sustain larger than expected kills during the week but particularly on Saturdays for several more months. At least they have plenty of money to pay overtime, as their operating margins soared in the second half of August to record levels. This was due both to the sharp decline in live cattle prices and the surge in boxed beef prices. This likely helped Tyson absorb an estimated $30 million to $40 million of added costs related to the fire.
September however was a softer month than August for retail beef sales and weekly beef production likely declined, putting more pressure on live cattle prices as packers attempted to stabilize boxed beef prices. The industry is now waiting for beef demand to pick up again in mid-October, as it seasonally does, and for this to reduce the impact of the continued absence of the Holcomb plant.