Perdue’s probe raises temperature in beef industry

When Secretary of Agriculture Sonny Perdue announced in late August he was going to direct the U.S. Department of Agriculture’s Packer and Stockyards Division to launch an investigation into beef pricing margins as a result of the Aug. 9 Tyson plant fire in Holcomb, Kansas, it caught the eye of beef producers at all levels.

Jerry Nine, an Oklahoma cattleman who also operates Woodward Livestock and writes a weekly column for High Plains Journal, has been critical of the pricing process and it was very clear in the aftermath of the fire.

According to his calculations, the price showed about $14.60 per hundredweight difference for a 1,500-pound Choice steer, Nine said, yet none of the cost savings was shared or will be shared with ranchers or consumers. He was hopeful Perdue’s investigation will be thorough and that if it is, it will show price manipulation.

Oklahoma State University Beef Extension Beef Marketing Specialist Derrell Peel said it was natural for producers to be concerned when they saw the plant that represented 6% about slaughter capacity was temporarily idled and the ensuing drop in future prices while demand remained sound.

“There is a lot of blowback that followed and clearly USDA is reacting to that blowback,” Peel said. “It doesn’t surprise me.”

Producers have been concerned about packer concentration as the four largest packers control more than 80% of the packing capacity in the U.S., feeding into a system with a handful of large chains of grocery stores that supply customers, Peel said. Also, it comes in a climate when lawsuits have been filed in recent years to try to make the public more aware of the level of concentration.

“I think USDA felt a need to do something to look into it with the perception right now out in the country,” Peel said.

The process allows outside forces to drive the futures down and then processors can sell the beef as high as they want, Nine said.

“This was a disaster, a catastrophe for the normal cattleman and they raised the prices and then buy the beef that much cheaper. I don’t see any difference,” Nine said. “The government should step in and say that is price gouging over a disaster. They don’t let gas stations raise their prices a $1 a gallon. I don’t see any difference.”

Perdue in his directive asked the USDA’s Packers and Stockyards Division to “launch an investigation into recent beef pricing margins to determine if there is any evidence of price manipulation, collusion, restrictions of competition or other unfair practices,” Perdue said in a statement. “If any unfair practices are detected, we will take quick enforcement action. “USDA remains in close communication with plant management and other stakeholders to understand the fire’s impact to industry.”

Peel said how long that will take is unknown. Historically, the Packers and Stockyards Division is not an agency that responds to short-term concerns in the marketplace, and market concentration would be addressed by other governmental entities. Typically, the Holcomb fire would likely be considered a short-term event and the markets did respond within a week after the fire to return much normalcy.

“It jumped right back up in a week and responded exactly the way I thought it would. I was not as concerned from that standpoint,” Peel said.

Glynn Tonsor, a professor in the Department of Agriculture Economics at Kansas State University, said the surprise development of losing packing capacity led to decreased derived demand for cattle, which depressed fed and feeder cattle prices. 

“Moreover, the cold storage stocks situation and uncertainty on event impact led to a large increase in wholesale beef prices,” Tonsor said.  “The directional impacts of these changes are consistent with supply and demand responses we would anticipate.  A focused analyses considering multiple factors involved, some of which are market-relevant and not explicit to the Holcomb fire, would be needed to comment on magnitude impacts expected versus realized.”

Peel said because of a lag in how the actual numbers are reported by USDA, the first week there was about a 4.6% drop in kill capacity, which reflects the size of the plant being taken off line as the plant slaughtered about 6,000 animals a day. However, within a week, the packing industry adjusted by adding more slaughter capacity, particularly on weekends, and is now within a 1,000 head a week of where it was pre-fire and so in many ways the industry itself helped to keep the capacity in lace to meet demand, he said.

“It is hard to characterize what ‘normal’ is in U.S. commodity markets currently,” Tonsor said.  “That said, there have already been some price adjustments partially offsetting the market reaction observed during the week of Aug. 12.”

Margins were also impacted and bore by feeders and packers because they had to take cattle to other plants and that has to be taken into account, Peel said.

However, all of this came at time even before the fire when many in the industry were concerned that aspects of the futures market were depressing prices even though demand appeared to be strong, particularly in the peak summer season, observers have said.

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Peel said several questions are at the forefront. Is there enough competition so that in general such events as the Tyson fire have less influence? Also what needs to happen to fix the marketplace and changes need to be made to how the market functions so it is more competitive for producers and consumers?

“These are still legitimate questions,” he said.

“I’m not against the packer making money and I’m not against the retailer making money,” Nine said. “I’m fine with them making money but when they’re making millions and we’re (just) trying to make a living.”

At the rancher level, Tonsor said producers have challenges and he said how to stay profitable goes beyond the single event of the Holcomb Tyson fire.

“I regularly suggest all producers have a firm handle on their production costs and their respective comparative advantage,” he said.  “That knowledge in turn allows them to make better managerial and marketing decisions, which would improve profitability.”

Nine said it is essential that cattle producers and feedyards who have been negatively impacted keep pressure on the investigative process and those who provide oversight.

“You cannot just sit on your sidelines and say nothing,” Nine said.

Dave Bergmeier can be reached at 620-227-1822 or [email protected].