Packer margins have a long-term impact on the performance of packing companies, and the picture for packer margins has not been good of late.
Our beef calculations use an average cutout value that includes both Choice and Select weighted by the each grade’s share. The by-product value comes from the USDA report.
Cattle costs are the weighted average total cost as reported by USDA for live and dressed steers and heifers. Values are based on calculated per-head values from the Livestock Marketing Information Center.
We stop at a gross margin level of detail for two primary reasons. First, we do not have operating cost data for most packing plants. Second, we believe operating costs are pretty stable in any given plant, meaning the variation in gross margins is close to the variation in net margins and equally indicative of packers’ desires and motivations to alter prices paid or operating rates.
The one weak point in that argument is the impact of capacity utilization on operating costs and thus net margins. Packers can live with slightly tighter margins when slaughter totals are large but need higher margins when numbers are tight. The supply situation for animals pushes margins in just the opposite direction — tighter when numbers are low and wider when numbers are high.
All of this is a prelude to point out that packer margins have not been good at all. Beef packer margins were below the 2007-11 average for virtually all of 2012.
Further, the net margins since August have been deep in the red — a factor that, along with prospects of lower cattle numbers in coming months, contributed to Cargill’s decision to close its Plainview, Texas, plant.
It is likely, in our opinion, that another beef slaughter plant could close before cattle numbers increase in late 2014 or 2015, assuming a return to normal rainfall in major grazing areas this year.
Pennsylvania Center for Beef Excellence Inc. with information from the CME Report, Cattle Buyers Weekly and other resources. For more information, call 717-705-1689.