A long way to go

Feb 1, 2013

The live cattle market regained all the losses that were realized two weeks ago after Cargill announced the closing of their Plainview, TX, beef plant. The market has made nearly a full recovery. I’ll admit, it was a bizarre day at the CME when the news came about. The February contract is near the same level as it was when the news broke and took the market limit down. We hate to see beef processing infrastructure go idle, but at the end of the day, it will be good for everyone in the beef and cattle business.

It was interesting that Cargill was the first major packer to close a plant. Someone had to do it and it makes you wonder if the packers all got together and drew straws to see who would be the first to pull the plug. The plant was rumored to be one of their worst performing plants, but it still had to be a hard decision to take out 15 percent of the company’s beef processing capacity with one shot. However, I’m sure it can be made up by running other plants at higher capacity. Getting a full shift on the kill floor has been a hard task to maintain for quite some time.

But Cargill has a lot of other segments of their business to worry about and their business as a whole is doing very well, with profit margins up 400 percent this last fiscal year. Cargill reported net earnings of $409 million in the fiscal 2013 second quarter ending Nov. 30, compared with $100 million in the same period a year ago.

Ironically, while one beef packing plant is closing down in the southern Plains, a new one is opening. Northern Plains Premium beef in Aberdeen, SD, is in the process of ramping up a brand new plant with 1,500-head per day capacity.

Now that the market has absorbed the Cargill episode and is back to some state of normalcy, the battle continues. Feeders seem content to sell at a $2 discount to the board and packers want to buy them at $4 discount to the board.

The cattle inventory report was due out last Friday and most were expecting to see the nation’s cow herd down 1.8 percent from a year ago to 86.135 million head. This would represent the smallest cow herd since 1952. From 1995 till now, the U.S. cow herd has declined 14.4 million head. The U.S. cattle industry has certainly learned how to produce more with less. The U.S. cattle industry has done an excellent job embracing new production technology, becoming more efficient. In 1975, the cow herd was producing an average carcass weight of 589 pounds per cow and today, that average carcass weight is 791 pounds and getting larger. Beef production has increased 18 percent since 1975 with 14.4 million fewer cows in production.

Consumer demand is starting to weigh in on the beef industry and lower production levels have not been able to pull the beef cutout values up to the point of positive margins for feeders and packers. Last week’s economic news was about the economy losing ground and the Gross Domestic Product declining one 10th of a percent. Also, the smaller paychecks folks are receiving compared to last year won’t help with disposable income. Even though there were plenty of beef features in last week’s grocery store advertisements, it’s clear that retailers are not too excited about pushing beef and certainly don’t seem too interested in securing any long term beef contracts for future promotions.

The news that Japan will be expanding their beef imports and will start accepting beef from cattle less than 30 months of age is encouraging. I wouldn’t expect to see any dramatic changes to the wholesale beef market right away. Japan’s economy is in recession and the yen has been devalued again, which will make it difficult for their consumers to jump in to expanded beef offerings. If they would drop tariffs and adjust their farm security programs, the U.S. could supply their consumers with volumes of less expensive beef.

April typically represents the start of grilling season and expanded beef sales. However, April is when most market watchers expect us to have our lowest supplies of fed beef. The cash market needs to get more in line with the futures markets; April is currently at $133.18. A $2 basis would represent a cash market of $131.18, which is fairly normal cash trade arithmetic. Cash prices at that level should force wholesalers into that elusive $200 Choice cutout value. Jim Rob at the Livestock Marketing Information Center said there are a lot of cattle looking at a $140 breakeven, which is an unpleasant thought. — PETE CROW