Markets’ Role In A Disaster

As the markets cool after Tyson’s fire at its Holcomb, KS, beef slaughter and packing plant, a well-known agricultural economist took a look at the role of markets in disaster situations.

Derrell Peel, from Oklahoma State University, examined market reaction in a letter to Extension agents called Cow/Calf Corner.  This is a shortened version of the letter.




Markets are the primary means that production and consumption are coordinated in the US economy.  They ensure that supply and demand are in equilibrium, or close to it, at all times and respond to changing conditions through countless small adjustments made constantly by producers and consumers.

Market adjustments typically are very subtle, much as driving a car depends on a constant stream of tiny adjustments to the steering wheel.

However, sudden, large shocks disrupt the balance of supply and demand and reveal how dramatic market actions help re-establish equilibrium.  The Tyson fire is just such an example.

With beef production suddenly decreased, boxed beef prices rose sharply to ration a suddenly limited supply.  Choice beef increased by more than $22 per cwt, or 10.3%, in one week.

This illustrates one of the most important functions of markets and one that commonly is taken for granted:  markets make sure we don’t run out of things.  The market uses higher prices to determine how limited supplies are allocated.

The corollary is that markets make sure we don’t waste products, which is particularly important for perishable products.  Fed cattle are perishable and the current drop in fed prices ensures that all possible adjustments are used to absorb them into remaining industry capacity.

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.




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.

Feeder cattle markets also decreased in the face of lower fed prices and the uncertainty roiling all markets.

Is the initial reaction an overreaction?  In one sense yes, but it is a very common market response to re-establish supply and demand balance quickly.  We see it in all markets and certainly in agricultural markets.

Corn prices of $7 a bushel in 2012 helped ensure increased production to overcome drought effects and meet growing demand; and $3 per cwt calf prices provided the temporary incentive to jumpstart herd expansion in 2014.

By virtue of extreme initial reactions, markets ensure that equilibrium in supply and demand is reestablished as quickly as possible.

The sudden shock of the current situation and the resulting big initial market reactions encourage buyers and sellers to change plans, incur additional costs, and react quickly to new arbitrage opportunities.




Cash cattle traded last week at $106 to $107 per cwt on a live basis, down $7 to $9 from the previous week, and at $170 dressed, down $11 to $13.

The USDA choice cutout Monday was up $0.44 per cwt at $239.13, while select was up $1.26 at $214.52.  The choice/select spread narrowed to $24.61 from $25.43 with 47 loads of fabricated product sold into the spot market.

No cattle were tendered for delivery against the Aug contract Monday.

The CME Feeder Cattle index for the seven days ended Friday was $136.33 per cwt, down $1.27 from the previous day.  This compares with Monday’s Aug contract settlement of $135.67, up $1.10.