– Dr. Kenny Burdine, Livestock Marketing Specialist, University of Kentucky
It seems like we are in phase 3 of the cattle markets trying to price in the impacts of COVID-19. In February, the markets were primarily pricing in the potential impact on beef exports. In March, they were trying to price in the impact on domestic demand from shutdowns, layoffs, and general decreased economic activity. And now that we are in April, the focus really seems to be more about the impact of plants operating below capacity, or temporarily shutting down, due to the virus. Volatility continues to be the best descriptor of what we are seeing, but this is my summary of USDA-AMS price data from Kentucky auctions April 3rd through April 9th.
I am writing this on Good Friday, April 10, 2020, so CME© futures are not trading. But, feeder cattle futures prices actually rallied this week with spring contracts closing on April 9th in the upper $110’s and fall contracts in the upper $120’s. This is probably why prices later in the week looked a bit stronger than prices earlier in the week. Despite the fact that marketings were low for this time of year, state average prices basically fell across all segments.
For the current week, the price of an 850 lb M/L 1-2 steer fell by about $3 per cwt. This is off by more than $25 per cwt from January, which translates to more than $200 per head. At the same time, calf prices broke more than I expected and were off by nearly $7 per cwt from last week. Thus far, it appears the calf market made its high in mid-February and is down by $9 per cwt from that point. It is not lost on me that I am literally writing this at about the time the calf market makes its high in most years. The loss in calf prices is not so much a question of how much calf prices have fallen, it’s more a question of how high prices would be otherwise (see figure 1).
Source: USDA-AMS, Livestock Marketing Information Center, and Author Calculations
Cull cow and slaughter bull prices were also down again this week, but only by a small amount. I do think processing capacity concerns are largely to blame here, especially since volumes have decreased. The state average price for 80-85% boning cows fell by roughly $1 per cwt from last week to this week, but are off by about $17 per cwt from their highs at the end of March. Cull cow prices can be seen in figure 2.
Source: USDA-AMS, Livestock Marketing Information Center, and Author Calculations
The optimist in me wants to point to strength in the futures market this week as a bullish indicator for the coming week. But, the market really does seem focused on the impact of reduced processing capacity right now and I have to believe that will get worse, before it gets better. Two of my colleagues, Glynn Tonsor (Kansas State University) and Lee Schulz (Iowa State University) released a quick assessment last week of the impact of reduced processing capacity. They estimated that a 1% reduction in capacity would be expected to translate to a 1.32% decrease in fed cattle prices. To help put this in perspective, recall that the Tyson plant in Kansas, that shut down due to fire last summer, accounted for 4-5% of total US cattle slaughter. Now that was an extremely large plant, but the more employees these plants have, the more likely they are to see labor issues. No doubt, some of this is already priced into the market and certainly the deferred futures market, but it drives home how significant this issue could become.