Cattle futures plummeted limit down as news of Cargill's Feb. 1 closure of its Plainview, Texas, plant filtered into the market. Prices began recovering before the close of pit trading. Recovery continued in electronic trade later.
Fed cattle prices plunged as traders worried that competition to buy fed cattle will diminish.
Feeder-cattle futures also skidded to their limit lows. Lower returns from fed cattle mean feedlots cannot afford to bid husky prices for feeder cattle. Feeder cattle also began recovering after the initial plunge lower.
Potential impact on cattle flow and prices
The United States has excess beef feedlot capacity and excess beef slaughtering capacity. Packing plants operate more efficiently and lose less money as long as beef brings a high enough price to pay the variable costs of the plant and leave some dollars to apply to fixed costs. Beef packers have been competing aggressively to buy cattle to capture those efficiencies. Therefore they have all (according to margin estimates that we have available) been losing money. The industry has been anticipating that one of the major packers would eventually close its least efficient plant.
Cargill idling the Texas plant means competition among remaining plants will diminish. Packers will try to drive fed cattle prices lower so as to attempt to improve their margins. That's what hammered Thursday's futures.
Beef feedlots in the vicinity of the shut down plant will see their cash fed cattle prices skid. They'll have to ship the cattle farther to slaughter. That ups the feedlots costs. Basis will also weaken among plants in the vicinity of the closed plant.
Cattle previously processed at the Plainview plant will instead likely be processed at other plants in Texas, Kansas and Colorado.
Cargill remains committed to beef business
Cargill, the largest private U.S. company in terms of revenue, said there was too much industry processing capacity in the Texas panhandle, with four plants.
"Other Cargill plants around the country will not be affected," says John Keating, president of Cargill Beef, based in Wichita, Kansas. The company has invested $766 million in its U.S. beef plants over the past decade.
"Our long-term commitment to U.S. beef production is unwavering," he says.
Cargill also says it will assist the displaced employees in trying to find jobs at other Cargill plants or with other companies.