A monthly column written for Beef Central by US market commentator, Steve Kay, publisher of US Cattle Buyers Weekly
PERFECT markets do not exist in the complicated world of livestock and meat pricing.
If they did, US packers who harvest grainfed (live) cattle would have shared half of the surge in wholesale beef prices in May with their cattle feeder suppliers. They did share some of it but nowhere near enough, according to some US producers.
So the topic will be examined in the months ahead by producer groups, USDA and US Justice Department. The questions will include: did packers contravene USDA’s Packers and Stockyards Act, and did they take part in any form of market manipulation?
Packers who harvest live cattle have been subject to investigations about their market behaviour for as long as I have covered the US beef industry. Not a single investigation has found any evidence that packers illegally used their market power to manipulate cattle or wholesale beef prices.
The latest investigations might well uncover behaviour that might be regarded as questionable, but I suspect they will not discover anything illegal.
Huge impact from COVID-19 on US beef
As I see it, supply and demand fundamentals determined the direction of live cattle prices and wholesale beef prices. Unfortunately, these fundamentals were distorted because of the huge impact of the COVID-19 pandemic on the US beef industry.
The impacts began in late February. The futures market panicked after the onset of the pandemic. The result was that from February 21 to April 6, the April live cattle contract lost 30 percent of its value and the June contract lost 27pc.
I find it interesting that no one has called for an investigation into the futures market’s behavior.
Then came the impact of the virus on processing plant operations. At least nine US beef processing plants closed for up to two weeks as workers contracted the virus or stayed home out of fear of contracting it. The result was that slaughter levels fell from 684,835 head in the week ended March 28 to an historic low of 438,614 head the week ended May 2.
This kill represented 60pc of industry-wide capacity. Kills then picked up as packers implemented multiple measures to keep their workers protected and reassure them that plants were safe.
Two things occurred during this period. Packers could only process a certain number of cattle, so they drew on formula-priced and forward-contracted cattle first. There was much less demand for cattle relative to supply and competitive bidding for cattle sold on the spot market declined dramatically from late March into late April.
Only 16,520 head were reported sold in USDA’s five-area region in the week ended April 17. But as kills increased, this number picked up to 66,185 head the week ended May 22.
The result was declining live cattle prices, even as the boxed beef cutouts began to soar. Live cattle prices (basis a five-area steer) averaged US$119.31 per cwt live the last week of March. The average fell it a low of US$96.69 per cwt live the week ended April 25. Prices are now back to US$117-120.
Meanwhile, USDA’s weekly comprehensive boxed beef report showed that the comprehensive cutout (cuts, grinds and trim) took off the week of April 24 when it averaged US$250.19 per cwt.
It had sky-rocked to an average US$421.80 per cwt the week ended May 15. The Choice cutout took the same trajectory but was about US$50 per cwt lower than the peak in daily values. That showed that daily values did not reflect the price of the majority of Choice beef sold.
Mandatory price reporting
The reporting of daily and weekly wholesale beef prices is one of the US industry’s greatest strengths. Mandatory price reporting requires packers to tell USDA what they have paid for live cattle and what they have sold beef for. Only distressed sale or products beyond a certain age are allowed to be excluded.
The daily boxed beef reports list the average prices of the seven major beef primals and dozens of individual cuts. USDA also reports daily the prices of 16 different grinds and two bull beef products.
These are all incorporated into USDA’s weekly report, which reports the average of the seven primals cuts, but not the grinds. The weekly report encompasses more transaction types than the daily report and, importantly, reports total volume sold, which is always far above the daily five-day total.
USDA also breaks out sales into four types, which gives insights into the flow of beef to the market. The types are negotiated sales delivered in 0-21 days, negotiated sales 22-plus days, formula sales and forward contract sales.
Not surprisingly, May 7 saw far more sales in the first category than normal, 36pc of total sales versus a normal level of about 25pc. Formula sales were somewhat higher than normal at 54pc to 57pc.The big decline came in both categories of forward sales. They bottomed at 7.9pc of the total in mid-May. Their normal share is 15-20pc.
The sales breakdown indicates that frantic retailers trying to replenish their cleaned-out meat cases were prepared to pay any price for beef for immediate ship. Compounding this was that weekly beef production had steadily declined through April. An uptick in food service beef buying meant even more competition for reduced beef supplies.
The result was the perfect storm of demand exceeding supply.
This and lower live cattle prices allowed packers to enjoy record operating margins, in spite of higher operating costs.
Should packers have shared more of their margins? They did share some by giving suppliers retrospective premiums, then putting a floor price in the market.
I must add that in 2014-15 when live cattle prices and feeding margins reached new record highs and packers lost money, no one suggested that cattle feeders should share their profits.
As much as Australian packers would like this to happen right now – given their current cattle supply challenge caused by drought – they also know how the market operates, and would never ask producers to give up any of their margins.