August 16, 2019 / 8:23 PM / a month ago

Tyson Foods slaughterhouse fire ignites U.S. beef prices

CHICAGO (Reuters) - Margins for U.S. beef processors climbed to a record high on Friday as the closure of a Tyson Foods Inc slaughterhouse due to a damaging fire last week fueled concerns about a shortage of hamburger meat and steaks.

FILE PHOTO: The exterior of the Tyson Fresh Meats processing plant is seen three days after a fire heavily damaged the facility in the Finney County town of Holcomb, Kansas, U.S. August 12, 2019. REUTERS/Adam Shrimplin/File Photo

The indefinite shutdown sent meat buyers for restaurants, food service companies and grocery chains scrambling for beef, traders said, because the sprawling facility in Holcomb, Kansas, killed about 6,000 cattle a day, or 5% of the total U.S. slaughter.

The fire accentuated already high margins in the U.S. beef industry. Ranchers are raising more cattle to take advantage of strong consumer demand for beef, yet the number of slaughterhouses has declined over the past decade.

Profit margins for packers such as Tyson, Cargill Inc [CARG.UL] and JBS USA [JBS.UL] soared to $344 per head of cattle slaughtered, up from $153 a week ago before the fire and above the previous record of $308, according to Denver-based livestock marketing advisory service HedgersEdge.com.

Margins increased as prices for choice cuts of beef shipped to wholesale buyers in large boxes climbed 10% this week to $237.85 per cwt, after the fire reduced production, according to U.S. Department of Agriculture data. Cattle producers, meanwhile, saw prices decline because the fire temporarily eliminated a key buyer of their livestock.

Cattle traded for $105 per hundredweight in cash markets in Kansas and Texas this week, down about 5% from the previous week, according to traders. That was the lowest price in the south since 2017, said Cassie Fish, a U.S. beef expert.

Fish, who formerly worked for Tyson, said it was unprecedented to have prices for boxed beef and cattle make such strong moves in opposite directions.

“The loss of one plant - that’s a very scary thing,” she said. “It’s the suddenness of it. It’s the not being prepared.”

Processors leapt into action to take advantage of the strong margins at a time when demand for beef often rises ahead of the Labor Day holiday in the United States, traders said.

They are expected to increase Saturday’s slaughter to 74,000 cattle from 48,000 a week earlier and 67,000 a year ago, according to the USDA. That would bring this week’s kill to 651,000 cattle, up from 642,000 last week.

Cargill, the world’s biggest ground beef supplier, told Reuters it was working with its customers to ensure minimal disruptions to their operations from the fire. JBS did not respond to a request for comment.

Tyson said it will rebuild the plant in Holcomb and use other plants to keep its supply chain full. However, the company said in an e-mail to Reuters on Thursday it will be months before the facility returns to full production.

“Right now there is a shortage because that was a significantly important meat production facility,” said Colin Woodall, senior vice president of government affairs for the National Cattlemen’s Beef Association, the industry’s main trade group.

Fast-food chain Wendy’s Co, famous for its fresh beef hamburgers, said it was in “close touch” with Tyson’s leadership team but did not expect disruptions to its supply.

CATTLE PRODUCERS LOSE MONEY

The fire could not have come at a worse time for cattlemen. The number of cattle being fed for slaughter reached 11.5 million head on July 1, a record high for that date since the USDA began tracking data in 1996.

The most actively traded October live cattle futures contract at the Chicago Mercantile Exchange has tumbled 8% since the fire and set a contract low on Friday.

“A wreck is whenever there is no confidence in the market and prices are plummeting,” said Corbitt Wall, a Canyon, Texas-based livestock market analyst for DVAuction who formerly worked for the USDA. “That’s what it is, is a wreck.”

The USDA is closely monitoring the effects of Tyson’s fire and is ready to provide additional staff to other slaughterhouses that are killing more animals, Under Secretary Greg Ibach said in a statement.

The estimated increase in this week’s slaughter should bring down beef prices, said Mike Sands, president of MBS Research. However, the tight labor market may make it difficult for packers to keep killing more animals on Saturdays while Tyson’s plant remains closed indefinitely, he said.

Ultimately, gains in beef prices could pinch consumers, said Justin Lewis, vice president for broker KIS Futures in Oklahoma.

“The grocery stores are not going to eat it,” Lewis said.

Reporting by Tom Polansek; Editing by Caroline Stauffer and Marguerita Choy

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