By Ted Tice, Agribusiness Consultant
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In case you haven't noticed, the common theme in the cattle and beef processor business for several quarters has been shrinking beef supplies, high retail prices, over-capacity and narrow and sometimes even negative margins. These trends remain firmly in place, but during the past few months there have been developments that enliven the narrative of the beef industry's current condition.

Industry consolidation

  • Cargill Shrinks — On January 17, in a blockbuster announcement, Cargill announced the permanent closing of its Plainview plant, representing about 4% of US slaughter capacity. Cargill cited the Southern drought and its effects on long term cattle numbers in the region as the cause of the closing.
  • JBS is now the biggest — JBS S.A. bought two beef plants that were owned by XL Foods in Canada — a cattle plant in Nampa, ID and cow plant in Omaha, NE — making JBS the largest US beef processor, replacing Cargill and leaping past Tyson Foods.
  • Texas was busy rearranging the deck chairs on the Titanic — Sam Kane Packing was purchased by a group of ranchers in order to continue to have an outlet for sale of their cattle. Similarly, citing dwindling cattle supplies, San Angelo Packing closed its operation, laid off its workers, and then was sold to Caviness Packing. Then, shortly after taking possession, Caviness gave the plant back, citing excessive costs to upgrade the facility!
Plants appear to be following the migration of cattle out of Texas and Oklahoma north to states like Iowa, South Dakota, North Dakota, Montana, and even Kentucky. Tyson and JBS cite their Northern plant locations as a competitive advantage for them.
With the closing of Cargill's Plainview, TX plant, experts now estimate the industry capacity to be 86%-89% depending on who you speak to, up from around 82% prior to the closing of Plainview.
To illustrate the difficulty that the industry has experienced, Tyson recently reported an operating loss in its beef segment of $26MM for the Q2 ended March 30, 2013 versus a $1MM loss in the same period in 2012. Tyson has long held that its Beef Segment should generate between 2.6%-4.5% operating margin, so these losses are not inconsequential. Actually, the company cited "improved results" (narrower losses?) in its Southern plants as soon as Cargill closed its Plainview plant. However, the company also reported that its Northern plants experienced margin compression as cattle were high priced relative to retail meat prices. Tyson's volumes for the quarter were off 3.8%, a direct result of fewer fed cattle available. In all fairness, due to seasonality, Q2 is always a difficult one for Tyson's beef segment.

One trade issue solved, another appears

  • Japan allows 30 month old beef — Japan will soon begin allowing the purchase of beef from cattle slaughtered in the U.S. up through 30 months of age. Currently Japan accepts beef from cattle aged up through 20 months. Since the vast majority of cattle slaughtered are in the 20-30 month range, this should boost exports to Japan. In 2003, before the BSE incident, the U.S. was Japan's largest beef supplier; since that time, Australia has overtaken the U.S.
  • Ractopamine ban — A few months ago both Russia banned the import of US beef, pork, and turkey that had residues of ractopamine, the ingredient in two popular growth hormones, Paylean (pork) and Optiflexx (cattle). Russia has been consistently the 2nd largest destination for variety meats exports since 2007. Russia is demanding a certification process. Packers are not sure how this can be done without running a ractopamine free plant. Ractopamine is already banned from beef products purchased in the US by the EU and China. This issue could be with the industry for some time.

Retail beef prices continue their march upwards

Choice beef sold for an average or $5.22/lb. in February, 3.5% above a year ago and 2.2cents/lb. over January's record high. All-fresh beef, which includes Select and store grade products sold for a record $4.915/lb in February, up 6.2% over a year ago and a record price. Tyson cites these high prices, especially in the premium cuts, as driving consumers to their chicken products, which is not surprising.
USDA retail meat prices, 2000-2013
 
Packer margins have a long term impact on performance of packing companies and the industry's ability to balance capacity with animal numbers. The picture for packers has not been good of late, and helps explain why Cargill decided to shrink its capacity. This chart prepared by my colleague Don Colter, illustrates the challenging environment the industry operates within. An average per head profit of $5.22/head since 2004 likely proved not to be adequate return on capital for Cargill's shareholders.
US packer/feeder margins 2004-2012
 

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Wells Fargo Agricultural Industries presents this analysis as a complimentary service to its employees and customers. It cannot guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates will change with all new market changes.