From Cattle Current:
The degree of price movement following the fire at Tyson's beef packing plant at Holcombe, KS may have been shocking, but the way the market reacted wasn't, according to Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. Markets seek to coordinate equilibrium between supply and demand, Peel explains in his weekly market comments. When a severe shock occurs to either, markets seek to reestablish that equilibrium as quickly as possible.
"With fresh beef production suddenly decreased, boxed beef prices rose sharply to ration a suddenly limited supply," Peel explains. "Choice boxed beef prices increased by over $22/cwt. or 10.3% in one week. This illustrates one of the most important functions of markets (one that is commonly taken for granted): markets make sure that we don't run out of things. With less supply available, the market uses higher prices to determine how limited beef supplies will be allocated. It is a common market reaction. When a freeze hits Florida, orange juice prices begin to rise immediately, not because there is an immediate shortage of juice but to make sure that the current supply continues to be available over time. Markets will never tell a consumer that they cannot have a product but prices will rise enough to convince some consumers not to consume as much of the product at this time."
As well, Peel says markets discourage wasting products.
"This is particularly important for perishable products. Thus, watermelon prices drop dramatically when the seasonal supply becomes available to make sure that all watermelons are consumed. Fed cattle ready for slaughter are no less perishable and the current drop in fed prices ensures that all possible adjustments are used to absorb the cattle into remaining industry capacity," Peel says. "Prices decrease enough initially to provide ample incentive to change existing production plans and cover the additional costs of shifting logistics and timing of production."
As for the steep decline in Cattle futures prices the first two days of last week, Peel explains, "It is one of the functions of the futures markets to anticipate the worst case scenario, especially in the face of much uncertainty, before moderating as the reality of the situation becomes clearer."
Week to week on Monday, Feeder Cattle futures were an average of $1.00 lower, but an average of $6.23 lower compared to two weeks earlier.
Live Cattle futures closed an average of $3.54 lower week to week on Monday Compared to two weeks earlier, they were an average of $6.84 lower.
Looking ahead, Peel provides some context, via a similar situation almost 20 years ago, when the ConAgra beef packing plant at Garden City burned and never reopened.
"Subsequent research confirmed initial reactions generally similar to the current situation." Peel says. "Most of the negative impacts on fed cattle prices subsided in three to six weeks after the event. Packing capacity, relative to cattle supplies, is somewhat tighter this time, so the impacts may be slightly larger or longer-lived. Nevertheless, boxed beef and cattle markets will likely adjust relatively quickly in the coming weeks with final adjustments depending on the duration of the plant closure."
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