Kay’s Cuts: US processors mired in red ink, as low herd impact bites

Steve Kay, Publisher, US Cattle Buyers Weekly, 12/05/2015


Steve Kay’s latest US industry column for Beef Central on circumstances faced by US packers makes compelling reading – particularly in the context of what lies ahead for cattle prices in Australia, and the looming Senate Inquiry into Australian cattle pricing and allegations of market influence by processors. Is Australia heading down a similar path?


Steve Kay 1 (2)

NORTH American beef packers knew 2015 was going to be challenging. But they probably underestimated how tough it would be to run plants at economical levels and make money.

Right now, it seems that profit margins this year might return to the meagre 1-2 percent levels of the 1990s.

Fed beef processors in both the US and Canada have been mired in red ink since last October. The reason is supply, although beef demand issues have begun to show up as well.

Widespread drought in the US in 2010 to 2012 did two things. It forced a lot more beef cows to slaughter than normal, which meant that calf crops declined sharply as well. That meant fewer steers or heifers going into feedlots and eventually to processing plants.

US cow-calf operators (although not their Canadian counterparts) then began to retain young heifers for breeding and for re-building their herds. Heifer retention in 2014 was up 4.5pc or 226,000 head on the previous year and has continued to gather pace this year. This has been in response to much better pasture conditions in the main cow-calf states and because of record returns for cow-calf operators. Various estimates put 2014 returns at $500 to $550 per cow, with 2015 returns possibly even higher.

The result was fewer cattle to put on feed late last year and so far this year. Cattle feeders have adjusted in two ways. They are feeding more Holstein steers that come out of the dairy herd. More significantly, they are feeding cattle longer than ever, to add pounds and to reduce turnover rates in their feedlots.

The average time on feed has increased by about 20 days in the past year. The result is that cattle have been marketed since last October at record heavy weights for the time of year. But cattle feeders are not being penalised for this, as they historically were, because packers desperately need the cattle. They are having to handle carcases that have dressed weights as much as 1000 pounds (455kg).

The realisation that giant carcases are here to stay caused Tyson Foods, the largest processor of grainfed cattle in the US, to plan two years ago a huge new slaughter floor at its flagship Dakota City, Neb., complex. Tyson spent $90 million on the new floor and started operations there in the first quarter.

Tyson admitted that the start-up increased operating costs and impacted its January-March quarterly beef results. But it now has the largest, most modern beef facility in the US, says president and CEO Donnie Smith.

The good news is that the plant started up fine, he told analysts on May 4. Tyson is working through any further start-up issues and the renovation will help give it access to bigger cattle, which was what the whole process was all about, he said.


Losses accumulating

Feeding cattle longer means cattle feeders have held the upper-hand over packers since last September, with the exception of January, and rationed supplies. That’s why grainfed cattle prices in the first quarter averaged US$162.43 per cwt, up 11pc from the previous year’s average of $146.34. This came after packers had paid a quarterly record of $165.60 in 2014’s fourth quarter.

It’s little wonder then that packers lost money in the Oct-Dec and Jan-March quarters. Tyson had beef operating losses of $6 million and $20, respectively, in the two quarters. Fourth largest packer National Beef Packing had pre-tax losses of US$35.5 million and $33.6 million, respectively.

The first quarter is usually the most challenging of the year for US beef processors anyway. My review of Tyson Beef’s results for the Jan-March quarter reveals that it has made an average of only $8.3 million in each of the last 13 years. National has now lost money in every first quarter for the past four years, for a combined loss of nearly $100 million.

Explaining its quarterly loss, Tyson cited higher live cattle costs, lower export volumes due to the West Coast ports labour dispute and start-up costs at the Dakota City complex.

Tyson paid US$400 million more in the quarter for live cattle than it did a year earlier and $1.2 billion more in its first fiscal 2015 two quarters (starting last October), it disclosed in a securities filing.

National Beef’s parent company, Leucadia National Corporation, said National continues to face challenges as a result of the drought that has reduced the number of cattle being processed in its facilities, which is negatively impacting margins.

It’s hard to imagine that Cargill and JBS USA, the largest processors of grainfed cattle behind Tyson, have fared any better. Both though have Australian operations which have been extremely profitable for a year. But they also have the two largest plants in Alberta, Canada (Cargill has another in Ontario), which have been losing money and running less than five days per week.

JBS reports its global first quarter results this Thursday. Beef Central will file a report, as usual, but reminds readers that Australian operations are not reported separately, but included in the broader JBS US beef division, along with Canada.


Beef prices act as handbrake on demand

Packers hope to offset their losses with profits in the second and third quarters. Margins indeed have returned to the black. But they might not realise the type of profits they put up last year. They are still paying US$161-162/cwt live for cattle and retail beef sales are spluttering despite the onset of the grilling season.

The reason is price. Beef prices are at record high levels while pork is much less expensive and chicken is dirt cheap. Retailers are featuring beef, but not as aggressively as last year. That’s because wholesale prices from mid-March on have been much higher than a year ago. These prices continue to be 10pc higher than last year and will further impact retailers’ ability to feature beef in July and August.

Retailers are therefore turning to pork and chicken to drive margins and attract shoppers, respectively. Pork is currently providing them with far better margins than beef. In turn, chicken (dark meat) is being offered at near-giveaway prices. Beef sales so far have been led by ground beef. But it is much more expensive than many pork and chicken items.

Major US supermarket chain Kroger at times has offered 10-pound ($4kg) bags of frozen chicken leg quarters for US$4.90, and chicken thighs and drumsticks at $0.99 per pound.

Ground beef has led retail beef sales to date, but they are now eroding because of chicken dark meat sales. Americans may love the taste of beef, but they must be finding these chicken bargains irresistible. It might be a long summer for the US beef packing industry.


Respected and well-connected US beef industry commentator Steve Kay, publisher of US Cattle Buyers Weekly, writes an exclusive column each month for Beef Central.




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  1. Geoff Haack, 12/05/2015

    I’d be very surprised if too many Aussie producers feel too much sympathy towards our processors should their profit margins suffer in the near future given their experiences since the live export ban.
    One of the intriguing points for me is the amount of “products” off the beef animal that are sold by the processing sector that the producer receives not a cent for. EG beef cheeks as mentioned in this newsletter yesterday, offal, cod fat, embryo blood etc. etc.
    Not bashing processors here but it does seem there would be a great deal of fat their end that should insulate their bottom line somewhat going forward with price rises for animals hopefully to continue upwards for some time

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