Livestock producers have long had an ambivalent attitude about meat packers. They complain that packers make profits at their expense. Yet when producers own meat companies, the results have often been disastrous. Producers have discovered that operating a successful meat plant or company has unique challenges not understood by outsiders. This is not unique to the U.S. I’ve seen the same attitudes and events in other countries, from the United Kingdom to Australia.
A financially healthy packing industry is vital to a country’s livestock industry. Packers who make money provide a reliable outlet for producers’ cattle, sheep or hogs. They can pay producers a price for their livestock that hopefully will keep producers in business. Lack of profitability in the U.S. meatpacking industry in the 1970s and 1980s caused massive consolidation and the disappearance of most small packing plants. This occurred in other countries as well and was primarily a function of economics.
While one might lament the consolidation of the U.S. beef packing sector, it is important to note that the market share of the top packers today is no greater than eight or 10 years ago. Those who talk about increased concentration are ignoring the facts. USDA concentration data reveal that the top four firms accounted for 70 percent of all cattle slaughter in 2007. My data say the top four had the same percentage in 2008. This percentage has been about the same for the past 13 years.
I’m tired of hearing the claim that four firms account for 80 percent of all the cattle slaughtered or beef produced in the U.S. The figure is 70 percent. Packer critics ignore this percentage and use the share that the top four firms have of steer and heifer slaughter. That share is about 80 percent, and again has not changed much in the past decade. USDA’s data show the percentage peaked at 81.4 percent in 1999 and 2000.
This means there are strong, smaller regional packers who provide alternative outlets to cattle feeders, especially those with superior quality cattle. The fact that they and the larger packers are all profitable is positive for the entire industry. Packers who slaughter and fabricate historically made margins of barely 1 percent, but in the past two years, their margins have increased significantly because they have been forced to operate much more efficiently.
Tyson Foods, the largest processor of fed beef, lost $244 million in operating income in its beef division in fiscal 2006. But in the first nine months of fiscal 2010, it had operating income of $421 million for an operating margin of 4.9 percent. National Beef Packing and Cargill have similar margins. Na tional
had record earnings in fiscal 2009, with a 3.2 percent operating margin. Its operating margin for the first nine months of fiscal 2010 was 4.4 percent. JBS USA Beef, which includes its U.S. and Australian operations, had a 5.9 percent EBITDA (earnings before interest, taxation, depreciation and amortization) margin in its 2010 second quarter.
Fed beef processors are managing the spread between live cattle and boxed beef better than they have ever done. This is positive for cattle feeders and producers because continued packer profitability will mean a strong market for live and feeder cattle. Conversely, if packers make less or no money, they will reduce production to force down cattle prices and force up the wholesale price of beef. This would be negative for both producers and for retail beef sales.
Meanwhile, it’s fascinating how supply and demand fundamentals are working so well in the cattle/beef complex even though some in USDA and the industry believe something is still seriously wrong with the market. Cattle feeders enjoyed a stunning contra-seasonal rally in live cattle prices in July and again in August. Prices the week before last reached $100 per cwt. for the first time since early May and it appears prices will remain strong into the fall. Prices for calves and yearlings are up 12 percent to 14 percent from this time last year and look to go even higher because of sharply declining cattle supplies. Analysts are forecasting that the national herd could slide to 92 million head by Jan. 1, 2011, down from 93.7 million on Jan. 1 this year.
The shrinking herd means total available beef supplies will continue to decline. These supplies include domestic production plus imports minus exports. Exports are up more than 25 percent so far this year on last year. Imports the first half of 2010 were down 10 percent on last year. They will grow the rest of this year and next, but will not make up the hole caused by smaller production and more exports.
This is good/bad news for the industry. The smaller supplies will help boost wholesale beef and cattle prices, but it means per capita beef consumption will keep falling. USDA forecasts consumption to be 59.1 pounds per person in 2010 and 58.1 pounds in 2011, versus 61.1 pounds in 2009. Chicken will increasingly fill the protein hole simply because of availability. Moreover, fewer cattle mean that some packing plants might struggle to operate efficiently. Who will producers blame if another plant closes? — Steve Kay
(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765- 1725. Kay’s Korner appears exclusively in WLJ.)