Almost a full year after Ag Secretary Sonny Perdue directed an investigation into beef packing margins following the Tyson Foods plant fire in Holcomb, Kansas, the USDA has released their report on the investigation. The release of the report was pushed back after the investigation was expanded due to the impacts that COVID-19 had on cattle and beef prices.
In the weeks after both events, the spread between the Choice boxed beef cutout and fed cattle prices rose to record levels. The purpose of the investigation was to examine whether any entities violated the Packers and Stockyards Act by taking advantage of the situation through price manipulation, collusion or other unfair practices.
“The closure of the Tyson beef packing plant in Holcomb, Kansas, after a fire at the facility, and the COVID-19 pandemic clearly disrupted the markets and processing systems responsible for the production and sale of U.S. beef,” said Secretary Perdue. “The report examines these economic disruptions and the significant increase in the spread between boxed beef and fed cattle prices that resulted from them. While we’re pleased to provide this update, we assure producers that our work continues in order to determine if there are any violations of the Packers and Stockyards Act. If any unfair practices are detected, we will take quick enforcement action.”
Montana Senator Steve Daines commented on the release of the report by saying, “USDA’s findings are an important step forward in the ongoing investigation and provides much needed details on the impacts of COVID-19 on cattle markets and beef prices. But more works needs to be done and I will continue to push the USDA and the DOJ to actively coordinate and conduct a complete and thorough investigation to ensure our Montana ranchers can compete in a fair marketplace.”
The 21-page report summarizes market conditions and prices before and after the Tyson plant fire and the COVID-19 pandemic. This report does not examine violations of the Packers and Stockyards Act as that investigation is ongoing.
Tyson Packing Plant Fire
The closure of the Holcomb, Kansas plant for nearly 5 months took approximately 5 to 6 percent of the nation’s beef processing capacity offline. The largest spread between boxed beef and fed cattle prices was recorded at $67.17/cwt, a record that was later broken following the pandemic this spring.
USDA’s key observations from the impacts of the fire are that the timing of it coincided with seasonal increased in beef demand leading up to the Labor Day holiday. Live cattle futures declined substantially in the days after the fire and were quickly followed by cash markets. Packers increased their processing volume at other plants through Saturday slaughter shifts and the total number of fed cattle harvested during the first three post-fire weeks actually outpaced that of the three weeks prior to the fire. USDA says that should not be unexpected as rising boxed beef prices and the higher price spread provided an incentive to packers to increase production.
COVID-19 had an even larger disruption to the U.S. beef supply chain. By the end of April, 40% of the nation’s beef processing capacity was idled due to COVID-19 illnesses among packing plant employees. During this time, the largest spread between beef and cattle prices was recorded at $279/cwt, over 300% above the record set just a few months prior.
In March, the market reactions were characterized by sudden changes in beef demand as consumers increased retail purchases and food service demand fell off dramatically. As packing plants shutdown due to outbreaks of COVID-19, beef production and packer demand for fed cattle was cut further. The Ag Department says this reduced demand for cattle may have contributed to lower fed cattle prices.
The report does say that these market reactions are only components for a f a larger discussion within the cattle, beef, and related industries that share a common narrative about a highly concentrated meatpacking sector. At the core of many of these 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.
The report does specifically dive in to Price Reporting and Transparency and discusses the 50/14 proposal. This proposal which has been introduced in Congress would require packers to purchase a minimum of 50% of their weekly cattle needs on the negotiated cash market for delivery within 14 days. In both of the events examined negotiated cash trade plummeted, making price discovery more difficult for the entire industry.
A few suggestions are offered in the report to address price transparency. First, it suggests tying minimum purchase thresholds to regional reporting abilities. If a region began to fail to meet confidentiality guidelines due to packers not procuring cattle on a negotiated cash basis, with the proper legislative authority, the Agriculture Marketing Service could track and inform packers of the requirement to make an additional percentage of such purchases in the following week to allow for reporting.
Other ideas include an online platform to encourage the negotiated marketing of fed cattle as well as a concept for creating and compensating a pool of negotiated cash market traders.
Risk Management Solutions
This report also examines the need for risk management solutions. The USDA suggests cattle producers could position themselves more effectively if they had better access to risk management training. Also, new commodity futures contracts like a boxed beef contract they say could be considered to offset producer risk. Lastly, the report points to recent changes to the Risk Management Agency’s Livestock Gross Margin and Livestock Risk Protection programs as improved tools for producers to manage risk.
The pandemic has created a surge in demand for mean provided by small processors and for consumers who are interested in buying meat direct from a farmer or rancher. One potential solution offered is USDA Rural Development grants to assist small meat processors in expanding their businesses.
The cooperative model has long been an option for producer collaboration to enhance marketing power. Small scale application of the co-op model has also proven successful in providing small producers access to processing services in limited instances. However, large scale co-op meat processing facilities have historically struggled to reach sustainable levels of profitability. USDA’s Rural Cooperative Development Grant funds centers for co-op development across the country that can offer technical assistance in organizing and forming a co-op.
Packers and Stockyards Act
Lastly, USDA suggested that changes or updates to the Packers and Stockyards Act may be necessary. A rule was proposed in January to establish criteria the Secretary would consider when determining if a violation of the P&S Act has occurred. They also say that small and medium sized producers could benefit from changes to the P&S Act designed to offset the impacts of operating in a concentrated industry where the market power resides with large meatpackers. Smaller producers are price takers in the market for fed cattle and lack the volume of larger producers to negotiate unique and advantageous marketing agreements with large meatpackers.
To read the USDA’s report, click HERE.