Packers announce cutback in operations
— Negative per head returns finally take their toll.
Three of the four major packing companies last week took a step toward improving profitability when they announced immediate cuts in the processing shifts at their beef plants. Analysts had been predicting the move for weeks as projected packer margins fell farther and farther behind break-even prices.
Bob Price at North American Risk Management Services, Inc. said the cutbacks were a result of all the usual concerns, such as poor margins, lower priced competing meats, and difficult trading conditions overseas.
The largest of the companies announcing cutbacks, Springdale, AR-based Tyson Foods, said the company intended to reduce its operating hours from 40 to 35 during the next six to eight weeks. That reduction alone will eliminate approximately 12,000 head of cattle from the slaughter mix each week.
A Tyson spokesperson blamed the slowdown at least partially on difficulties in export markets and the expected seasonal softening of beef demand.
“Access to key export markets remains limited. Competing meats, such as pork and poultry, are significantly less expensive (than beef), and we’re in the fall season when beef demand historically softens,” the company said in its statement. In addition to the cuts in slaughter at its primary Plains states plants, Tyson announced its Boise, ID, beef plant would be permanently shuttered last Tuesday, as had been previously planned.
The losses in the beef industry have weighed heavily on Tyson Foods, with quarterly losses reported in May and July. The third quarter report, issued in July, showed Tyson was $53 million in the red. It is widely anticipated that the company will also record a loss for fiscal year 2006 which ended Sept. 30. Competing proteins such as chicken and pork, which sell at retail for less than beef, have also contributed to the problems in the beef market.
National Beef Packing Co. also put the brakes on its operating hours last week when it reduced its hours at Dodge City, KS, and Liberal, KS, to an estimated 37 hours per week, down from its normal 40 to 48 hours per week. The company said it had gradually been cutting back its operating hours for the previous two weeks before making the official announcement.
“We’re normally a six-day-a-week operator, so for us, this is a dramatic cutback,” company spokesman Keith Welty said. He said he was unsure of the cost savings for the company as a result of the reduced operations. According to Welty, there are 3,100 employees at the Liberal plant and 2,800 employed in Dodge City.
In a release, National Beef President Tim Klein attributed the action to “poor demand, tight supplies of cattle, and the continued limited access to our export markets.”
“We do not expect market conditions to improve for several months,” Klein said. “We will make a concerted effort to keep our suppliers, customers and employees abreast of our reduced production schedule.”
By the end of the day last Tuesday, Swift & Company, the third-largest processor of fresh beef products in the U.S., also announced its intent to limit production at three of four domestic beef processing facilities. The company said it plans to limit its kill schedule to only 32 to 37 hours per week. Swift cited declining gross margins due to high cattle prices, seasonally weak domestic boxed beef demand, and limited access to key international export markets as the key reasons for the production cutback.
Swift officials said the company intends to limit production at its Cactus, TX, Grand Island, NE, and Greeley, CO, plants until beef processing gross margins materially improve. The company said it, too, had been working reduced kill shifts for the past several weeks.
Although Cargill Meat Solutions (CMS) has not publicly announced it will reduce operating hours or kill level, CMS spokesman Mark Klein said the company had been working at a slower rate for the previous month.
“We have been managing our hours, including reducing them for the last 30 days. It has been on a week-by-week and plant-by-plant basis depending on availability of cattle and the price,” Klein said.
Last Wednesday, after the reductions were announced, HedgersEdge.com estimated packer losses in excess of $50 per head. Analysts said they expected the cutback in harvest would help support the boxed beef cutout prices and, as a result, boost packer margins. However, despite the cutbacks, slaughter volume was still above year ago daily and weekly totals last Tuesday when packers harvested 128,000 head. That figure was 7,000 above the prior Tuesday and 12,000 head more than a year ago. For the week to date, 255,000 head had been harvested, 6,000 more than the prior week and well above the same week in 2005 when packers killed 240,000 head.
Packers haven't been the only ones impacted by large supplies of slaughter-ready cattle and a decline in boxed beef prices. According to information from the Livestock Marketing Information Center (LMIC), feedlot closeout prices have hit cattle feeders hard for much of this year. High feeder cattle prices and a stronger than normal grain market have kept them in the red as well. In coming months, break evens will move even higher, making it increasingly difficult to regain positive margins at the feedlot level. For example, the estimated monthly breakeven for a 750-pound steer that will reach slaughter weight in January 2007 is just over $98 per cwt., according to LMIC data. — John Robinson, WLJ Editor