Cattle Current Daily—Apr. 7, 2020

Cattle Current Daily—Apr. 7, 2020

The weekly five-area direct fed steer price last week was $8.23 less than the prior week on a live basis at $111.08/cwt. It was $11.95 less in the beef at $176.93.

Chatter to start the week included wonderment about reduced slaughter this week, given last week’s decline in volume, scheduled maintenance at packing plants and further indications that labor issues could intensify (see below).

Perhaps that was one reason behind the limit down move in spot Live Cattle futures (closing at $83.82), while buying interest picked up across most other contracts.

After $4.50 lower and 55¢ lower in the front two contracts, Live Cattle futures closed an average of $1.74 higher, (52¢ higher to $2.30 higher toward the back.

Feeder Cattle futures closed an average of $2.26 higher, ($1.20 to $2.90 higher).

Wholesale beef values were weak to lower on light to moderate demand and heavy offerings, according to the Agricultural Marketing Service.

Choice boxed beef cutout value was 39¢ lower Monday afternoon at $230.05/cwt. Select was 81¢ lower at $215.03.

Corn futures closed mostly 2¢ to 3¢ lower.

Soybean futures closed 3¢ to 4¢ higher.

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Major U.S. financial indices surged sharply higher Monday, with various data suggesting stable to slower spread of COVID-19 here and abroad. The bounce came despite renewed pressure on front-month Crude Oil futures (WTI-CME).

The Dow Jones Industrial Average closed 1,627 points higher. The S&P 500 closed 175 points higher. The NASDAQ was up 540 points.

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Potential for COVID-19 disrupting packing plant production—or any other key components of the supply chain—is a growing concern with reports of confirmed cases at specific plants, reduced production schedules, slower production and labor absenteeism.

Agricultural economists, Glynn Tonsor at Kansas State University and Lee Schulz at Iowa State University offer insight to potential impact on fed cattle prices.

Relative to the supply of slaughter cattle—the same number of cattle or increasing cattle numbers—cash fed cattle prices decline as beef packing plant capacity utilization increases, according to Assessing Impact of Packing Plant Utilization on Livestock Prices.

Said another way, cash prices decline as competition for hook space increases.

“It should be noted that packer capacity is not an average annual concept, it’s how close the industry is to capacity at peak harvest times. Peak fed cattle slaughter typically occurs in the summer,” say Tonsor and Schulz.

With their specific modeling, Tonsor and Shulz found that 1% more national beef packing plant utilization corresponded to a 1.32% reduction in cash fed cattle prices. Their report details the model development they utilized to estimate capacity utilization and price impacts.

“Accordingly, for demonstration purposes, if the industry operates at 20% lower capacity rates (increased capacity utilization), then we may anticipate fed cattle prices to decline by 26.49%. The extent to which these effects are already priced into the market are beyond the scope of this report, but regardless this clearly demonstrates the economic importance of packing plant utilization on cattle prices.”

Fed cattle price declines in the wake of last summer’s Tyson packing plant fire offers a real-world example of the concept.

As logic suggests, pork packing plant utilization impacts finished hog prices similarly.

“The model indicates that a 1% increase in national pork packing plant utilization corresponds with a 1.82% reduction in hog prices. Using the hypothetical scenario of pork slaughter operating at 20% lower capacity (increased capacity utilization), based on our model, we may anticipate hog prices to decline by 36.35%,” according to Tonsor and Shulz. “Again, the degree to which this may be already priced into the market is unknown.”

Moreover, Tonsor and Shulz emphasize their approach offers a broad context, considering aggregate effects at the national level.

“Regional effects on markets more closely aligned with any specific plants altering operation would likely differ,” they explain. “The impact of a particular plant closure would likely have a lot to do with its location and its size. For example, in 2018, cattle slaughter plants under federal inspection (FI), with 1 million head or more annual capacity slaughtered over 56% of the FI cattle slaughter. FI hog slaughter plants with 3 million head or more annual capacity slaughtered over 62% of the FI hog slaughter. This reflects the leveraged, aggregate economic impact that would occur from decreases in capacity of larger plants.”

2020-04-06T18:58:37-05:00

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