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Kay’s Cuts: Abattoir fire strikes at heart of US cattle market

Guest Author, September 5, 2019

Beef Central’s US red meat and livestock industry commentator Steve Kay outlines the impact that’s been seen on US fed cattle and feeder cattle markets since last month’s fire at Tyson Foods’ Holcomb processing plant. The Australian beef processing industry suffered a similar fire less than two years ago when TFI’s Murray Bridge plant went up in flames.

 

 

 

‘Fire’ is a word that strikes deep unease and at time fear into the hearts of many Australians and Americans.

In northern California where I live, tragic fires since late 2017 have claimed countless lives and caused billions of dollars of damage or destruction on a scale never seen before.

The Tubbs fire in October 2017 hit parts of three counties and caused at least 22 deaths just in Sonoma County where I live. It was California’s most destructive wildfire at that point. Most of the damage and deaths occurred in Santa Rosa, a small city 20 miles from my house. I still remember wondering for several days if the fires would force me to evacuate, and I had my car loaded with a few irreplaceable possessions. I was lucky, as the fires never posed a threat.

Industrial fires can also be devastating and the meat processing industries in both Australia and the US have been fortunate to have avoided large fires for some years.

But that ended on August 9 when Tyson’s Foods’ Holcomb, Kansas, beef processing plant was seriously damaged by a mid-evening fire. No one was injured but the fire put the plant out of action probably for the rest of the year.

The market consequences were immediate and continue to this day. The US beef industry has in the past endured ‘weather’ and BSE-related markets 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 6000 cattle per day.

(Editor’s note: To put this into some context, Australia’s largest beef plant, JBS Dinmore operates at 3400 head per day.)

In the US industry, only Tyson’s Dakota City, Nebraska, plant is larger than Holcomb, at 7000 head per day.

The Holcomb fire took out more than 30,000 head per week of capacity. The loss is most directly impacting 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 August 1 than a year earlier and Texas had 40,000 more on feed. That’s against a national inventory that was record large for the date but up only 19,000 head than a year ago. Conversely, Nebraska had 140,000 fewer cattle on feed on August 1 than last year.

Futures market grossly over-reacted

The fire thus hit the very region that could least afford to lose any capacity. Had a fire put a large northern plant out of action, I suspect the market impact would have been much less. On the other hand, futures traders are not the most logical bunch, and there might still have been a big sell-off in live cattle futures. 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. USDA’s 5-area average prices the week after the fire fell US$5.69 per cwt live and US$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.

The irony of this is that Tyson moved swiftly to shift production to its other five plants and other packers increased their daily and Saturday slaughter levels. 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 an estimated 654,000 head and 77,000 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 have fallen nearly US$7 per cwt from the-pre-fire week. But the futures market has not recovered much of the ground it lost in the week after the fire and probably will not. The nearly October live cattle contract closed under US$100 per cwt on September 3, down nearly US$7 per cwt from August 9.

Market factors in play

Several other market factors have been at 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 have also been eager to get shackle space at a packing plant. The result is that the sales volume on the negotiated cash market has been smaller than normal since the fire and is raising concern.

The big question going forward is whether packers have sufficient workers to sustain such 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 have soared to record levels. This was due both to the sharp decline in live cattle prices and a surge in boxed beef prices. But September is a softer month for retail beef sales than August, and weekly beef production will likely decline, putting more pressure on live cattle prices.

 

Related topics covered on Beef Central:

Major US beef abattoir fire could disrupt beef and cattle markets

Processor insurance premiums surge, in wake of recent plant fires

TFI to re-build Murray Bridge processing facility after 2018 fire + VIDEO

 

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Comments

  1. Peter Vincent, September 6, 2019

    Which further adds to the assumption that any market, be it red meat, grains or securities is not governed by sensibility but by sheer weight of investment to manipulate a market for financial gain.

  2. Anthony Pratt, September 5, 2019

    Jon,
    Just a note on above comments. Dinmore has operated at 3400 per day since 2013. While we miss the odd day with weather related supply issues the plant consistently operates at 3400 per day.
    Regards
    Anthony Pratt, COO JBS Australia Northern

    Thanks Anthony – article now amended to reflect that. An oversight on our behalf. Editor

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