Kay's Korner

Feb 1, 2013

Closure won't hurt market

It was to be expected that the futures market would react negatively to the news that Cargill was to idle its Plainview, TX, beef processing plant from last Friday.

Plainview was the sixth largest plant on the Southern Plains and its idling causes 4,650 head of daily slaughter capacity to be lost to cattle feeders. But the market grossly over-reacted and Plainview’s absence will have little impact on Southern Plains’ live cattle prices this year.

That’s because the plant’s closure (it’s hard to imagine Cargill reopening it) only realigns packer capacity in the region with available fed cattle supplies. This column was written before USDA released its latest Cattle on Feed (COF) report. But the Dec. 1 COF total in Texas was 10 percent below the previous year and will continue to decline because of reduced numbers of cattle coming north from Mexico and in the region. In addition, Kansas’ Dec. 1 total was down 8 percent. These two states and Oklahoma had 520,000 fewer cattle on feed Dec. 1 than a year earlier. So the Southern Plains region might feed 1 million fewer cattle this year than last.

The futures market ignored these facts and knocked 357 points off the February live cattle contract after Cargill made its announcement. Not all of the two-day sell-off was attributable to Cargill’s announcement. Beef sales were unusually soft in January and the industry now faces its two weakest demand months of the year. But Southern Plains COF numbers are low enough to offset the loss of the Plainview plant. This also suggests the region might soon restore its price premium to the Northern Plains, where COF numbers are growing.

An analysis of slaughter capacity in the region suggests that competition will remain strong among packers for fed cattle. Until last Friday, Kansas and Texas each had four large plants with a combined daily slaughter capacity of 44,950 head. Cargill among the four major packers appeared most likely to act because it had three plants in the region versus two each for Tyson Foods and National Beef Packing and one for JBS USA. In addition, the Plainview plant is only 70 miles from Cargill’s Friona plant.

Idling the plant reduces national slaughter capacity (fed and non-fed) by 3.3 percent, according to my data. It reduces the Kansas/Texas slaughter capacity by 10.3 percent and the Texas Panhandle capacity by 22.2 percent, from 20,950 head per day to 16,300 head per day The Panhandle now has Tyson’s plant in Amarillo, JBS’ plant in Cactus and Cargill’s plant in Friona. The idling benefits both Cargill and other packers by allowing them to run their plants at higher rates of capacity utilization. Cargill’s remaining plants in the region, at Friona, Dodge City, KS, and Fort Morgan, CO, will receive cattle that were previously destined for processing at Plainview, it says. But if COF numbers on the Southern Plains and in Colorado continue to decline this year and next, packers will continue to struggle to run their plants at the levels they would like to.

Cargill worked hard to keep its Plainview plant operating efficiently, even processing cows to supplement numbers. But the catastrophic 2010-2011 drought centered in Texas and Oklahoma made it increasingly difficult to find enough cattle. Last January’s annual cattle inventory report showed that Texas and Oklahoma lost a combined 948,000 beef cows in 2011. New Mexico lost 53,000 cows while Kansas lost 51,000 cows. Cow numbers might have declined again in 2012, especially in drought-stricken Kansas, as USDA’s annual report on Feb. 1 likely showed. The above four states lost 1.052 million beef cows in 2011 and likely lost more in 2012.

Another supply factor, one that Cargill didn’t mention, is the projected large decline in Mexican feeder cattle imports this year. Catastrophic drought in northern Mexico forced the second and third largest number of Mexican feeder cattle ever to enter the U.S. in 2011 (1.447 million head) and 2012 (1.421 million head). Conditions there improved in the past two months and should they continue to improve, far more cattle will stay in Mexico. Moreover, Mexican producers sold so many more spayed heifers to the U.S. than normal in 2012. They will now need to retain heifers to start rebuilding their herds.

This means Mexican imports might decline by 0.5 million to 0.7 million head this year but by much more if the same pattern occurs as in the 1990s. A record 1.653 million head came north in 1995 after drought in northern Mexico and a weak peso.

The total the next year slumped to 456,000 head and it took until 2000 for the total to climb back to 1 million head. Such a decline this year would likely force a number of Southern Plains feedlots to close. — 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.)