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Kay’s Cuts: Extremes in profit and loss between US and Australian processors  

Steve Kay, 16/12/2021

A monthly column written for Beef Central by US meat and livestock industry commentator Steve Kay, publisher of US Cattle Buyers Weekly

 

 

 

 

BEEF processing giants JBS and Cargill must be extremely thankful at present that they have extensive North American operations. Those businesses saw all-time record profit margins this year, while their operations in Australia had their biggest losses in a generation.

As Beef Central’s Jon Condon reported earlier this month, a processor margin model showed that average monthly processor margins in Australia slid from a loss per head of $357 in September to a loss of nearly $433 in October, the worst monthly margin on record since early 2000. The October result brought the annual average margin loss for 2021 to $321 per head of cattle processed.

In stark contrast, US grainfed beef processors made profits of US$562per head (the equivalent of $780 Australian) through the first nine months of the year, according to data from HedgersEdge.com. The first quarter saw margins average US$301 per head, the second quarter US$698 per head and the third quarter US$688 per head. October saw profits of US$580 per head and November saw profits of US$452 per head.

As if these profits weren’t large enough, the amount of money that Tyson Foods’ beef business made was stunning. Tyson is the world’s largest producer of high quality, grainfed beef, so is in an excellent position to take advantage of the growing global demand for that kind of beef.

Its results reflected this. The segment in Tyson’s fiscal fourth quarter ended October 2 had operating income of US$1.147 billion, beating its previous record of US$1.120 billion set in the prior quarter. Operating income for the year was a record US$3.24 billion, twice the previous record of $1.58 billion set in fiscal 2020.

The results meant Tyson Beef has had four consecutive years with operating income in excess of US$1 billion. The beef results significantly boosted Tyson’s overall results for the year. Tyson Beef contributed 74 percent to Tyson’s overall operating income of US$4.396b. Beef’s operating margin (sales versus income) for the year was 18pc. Tyson expects that margin to be 9pc to 11pc in fiscal 2022, which began October 3.

Tyson Beef’s remarkable results reflected how much beef demand at home and abroad has outstripped available supplies of beef since the COVID pandemic began.

Tyson in fiscal 2021 operated its beef plants at only 78pc of capacity, it reported in a securities filing. This meant its slaughter total was 6.287 million head, which meant its operating income was US$515 per head.

Labour challenges

The utilisation rate reflected the ongoing labour shortage at Tyson plants and those of most other large companies in the US meat and poultry industry – as well as overseas in countries like Australia. Tyson’s chicken and prepared foods plants ran at 79pc in the fiscal year. But its pork plants ran at 88pc.

Tyson’s poultry plants are now fully staffed for the first time in two years, president and CEO Donnie King told me last month during a media call. Overall absenteeism is better than it was a month ago and 96pc of its US workforce is now vaccinated, which is an advantage for Tyson, he said.

To attract workers, Tyson has to be the most sought-after place to work in the industry. It has significantly increased wages, has experimented with childcare facilities and put more flexibility into working hours and shifts, he said.

A deeper look at Tyson’s beef results showed that its volume in its fourth quarter was down 15.4pc on the same quarter last year. But its operating income improved dramatically because its average sale price was 32.7pc higher than last year.

For the year, volume was up 0.3pc and the average sale price was up 14pc. For the year, sales totaled US$18b, versus US$15.74b in fiscal 2020. Tyson in 2021 sold beef products in 140 countries and those export sales totaled almost US$5b, up from US$4b in 2020.

Big grainfed cattle rally

Meanwhile, the US grainfed cattle market has enjoyed a big rally in prices which began in mid-October. The rally undermines calls by federal lawmakers for legislation to “fix the broken” live cattle market.

Some recently introduced measures that would upend the way in which the majority of live cattle are purchased by packers. They argue that the measures they propose would put more money in producers’ pockets.

How then, would they explain that cash live cattle prices from mid-October increased US$19 per cwt live in eight weeks, with nearly US$16 of that coming in five weeks to early December? In other words, the much-maligned market has hit its highest level in more than four-and-a-half years. It finally has the traction that US cattle feeders have been waiting all year for.

Why has this occurred? Certainly not because of any new federal laws or regulations but because of the simple rules of supply and demand. The market had laboured for 18 months under the weight of a front-end supply of cattle that on June 1 last year was one million head larger than the total on the same date the previous year.

That it took all this time to clear the backlog was of intense frustration to cattle feeders.

But there was no nefarious plot by packers to keep prices depressed. Put simply, there were too many cattle for packers to harvest (given their current labour-constrained capacity) until recently.

Beef demand at home and abroad was stellar all during the 18 months. But US packers did not have enough workers to run their plants anywhere close to capacity. Lack of labour hurt cattle prices far more than any other factor.

But try telling that to lawmakers.

 

 

 

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Comments

  1. Doug Miles, 17/12/2021

    It is in stark contrast to the more than 30 years of losses that the producer has suffered. With the heat being experienced in the store market currently, any sort of correction in processing sector many cattle people will experience a hefty gut ache as the slim margins YOY on these cattle will evaporate.








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