The U.S. Department of Agriculture released its long-awaited report on the impact of the 2019 fire at Tyson Foods’ Holcomb, Kan., beef plant and impact of the COVID-19 pandemic on beef price margins. The report failed to identify wrongdoing by market participants but did offer suggestions on how to improve transparency in the market and create additional opportunities for small and local processors.
In the weeks and months after both events, the difference – or spread – between the Choice boxed beef cutout values and dressed fed cattle prices rose to records levels.
“Findings thus far do not preclude the possibility that individual entities or groups of entities violated the Packers & Stockyards Act during the aftermath of the Tyson Holcomb fire and the COVID-19 pandemic. The investigation into potential violations under the Packers & Stockyards Act is continuing,” the report stated.
However, the North American Meat Institute (NAMI) pointed out that the report found no wrongdoing. “In its analysis of the effects of the fire and the pandemic, USDA found no wrongdoing and confirms the disruption in the beef markets was due to devastating and unprecedented events,” NAMI president and chief executive officer Julie Anna Potts said.
As it relates to the COVID-19 impact, the report said boxed beef cutout values increased and fed cattle prices were volatile in March as packers operated near full capacity. From the middle of March to early April, the spread between boxed beef values and fed cattle prices increased from $34/cwt. to $66/cwt. The spread had averaged just under $21/cwt. for 2016-18.
During April and May, there were significant beef supply disruptions as large numbers of plant workers contracted COVID-19. Plant closures and slowdowns negatively affected beef production and packer demand for fed cattle. This reduced demand for cattle may have contributed to lower fed cattle prices. An additional surge in consumer retail demand occurred in April, when consumers appeared to react to the possibility of beef shortages in grocery stores.
“The supply disruptions and additional surge in demand may have contributed to a sharp increase in beef values,” the report said. “At the same time, packers purchased fewer cattle as plant closures and slowdowns increased.” From early April until the second week of May, the spread grew from $66/cwt. to over $279/cwt. -- a 323% increase.
Regarding the Holcomb plant, USDA noted that the timing of the fire in early August coincided with the seasonal increase in boxed beef demand leading up to the Labor Day weekend. Typically, many retailers make pricing and promotional decisions several weeks in advance of the Labor Day holiday.
Futures prices for fed cattle decreased significantly in the days immediately after the fire. Fed cattle markets then followed with price decreases. Shortly after the fire, packers increased their processing volume primarily through the addition of Saturday slaughter shifts. There was a marked drop in the number and percentage of negotiated cash sales of fed cattle immediately after the fire.
The plant closure appeared to affect the spread between boxed beef values and fed cattle prices, USDA noted in the report. The spread between the two peaked at a then-record high of $67.17/cwt. the week ending Aug. 24, while the average for the same week during 2016-18 was $27.66/cwt. -- a difference of $39.51, or 143%.
Rep. Dusty Johnson (R., S.D.) said in a media call just an hour after the report was released that he is disappointed that the report did not offer a final statement on any potential market conduct violations. “After a year of looking, I expected USDA to say there was misconduct or was not. If there wasn’t misconduct, it adds more fuel to the notion that the marketplace is broken in other ways,” Johnson said.
Both the Holcomb fire and COVID-19 impact directed increased attention to the ongoing concentration in the beef marketplace, which is nearly 80%. USDA’s report noted that at the core of several discussions is the desire by many market participants for improved price discovery, reinvigorated competition and a more transparent relationship between the prices for live cattle and the resulting products.
USDA offered several suggestions for improving the market, including adding capacity at smaller processors, allowing these smaller processors to sell across state lines and finding ways to add more capacity for smaller processors.
“Smaller producers often find themselves to be price takers in the market for fed cattle and lack the volume of larger producers to negotiate unique and advantageous marketing agreements with large meat packers,” USDA noted. In efforts to address this imbalance, there has been discussion of creating a beef contract library similar to the swine contract library USDA currently maintains pursuant to Section 222 of the Packers & Stockyards Act. Amending the Packers & Stockyards Act to develop a similar library for beef transactions could help increase price discovery in cattle markets and enhance access to market information for all market participants, regardless of size, the report stated.
The report noted that the Agricultural Marketing Service (AMS) has also explored a 14-day slaughter scheduled delivery submission requirement through Livestock Mandatory Reporting (LMR), a precedent currently in place for daily LMR swine reporting. A change in the LMR cattle submission form would be required to allow for the capture of the slaughter schedule. Under this scenario, beef packers could report daily the number of cattle scheduled to be delivered for slaughter each day for the next 14 calendar days.
“In light of steadily decreasing percentages of negotiated sales and continued market volatility, USDA is also aware of a variety of proposals by external stakeholders that would require packers to meet a minimum threshold of purchases via negotiated cash trade. Likewise, USDA is aware of the variety of concerns with these proposals and potential unintended consequences throughout the industry, especially if regional considerations are not adequately considered,” the report said.
USDA noted that such regional disparities might be addressed, in part, by tying the minimum purchase thresholds to regional reporting abilities. Under this approach, if an LMR region began to fail to meet confidentiality guidelines due to packers not procuring cattle on a negotiated cash basis, with the proper legislative authority, AMS could track and inform packers of the requirement to make an additional percentage of such purchases in the following week to allow for reporting.
The LMR expires Sept. 30, and Johnson didn’t rule out the possibility that some of the legislative proposals supported by USDA in the report could be included, but it would take a “ton of work on our part to make that happen.” He did say he hopes that it adds momentum to many of the legislative proposals on the table to increase market transparency and price discovery.
However, Potts stated, “It is difficult to see how the USDA’s recommended legislative proposals would have changed the outcome of the fire or the pandemic.”
The National Cattlemen’s Beef Assn. (NCBA), which initially requested the investigation, said the information in the report will be very helpful and timely to the cattle industry’s robust discussion of cattle markets and price discovery during its Summer Business Meeting next week in Denver, Colo.
USDA does not solely own investigatory authority over anticompetitive practices in the meat packing industry and has been engaged in discussions with the U.S. Department of Justice regarding allegations of anticompetitive practices in the meat packing industry, the report noted. Should USDA find a violation of the Packers & Stockyards Act, it is authorized to report the violation to DOJ for prosecution.
NCBA vice president, government affairs, Ethan Lane said NCBA is also collectively still awaiting the results of the DOJ investigation.