Kay’s Cuts: A wall of US meat, or a tidal wave?

Steve Kay, Cattle Buyers Weekly, 13/03/2018

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









THE US beef cattle industry uses a variety of expressions to describe supply and demand factors or trends.

On the supply side, the word ‘current’ is used to say whether cattle feeders are marketing cattle on a timely basis. On the beef side, one of my favorites is ‘sell it, or smell it.’

Various expressions are being used to describe the pending build-up in market-ready supplies of US grainfed cattle. Analysts are warning that unless marketing rates pick up sharply, the market might be overwhelmed with cattle this summer.

In years past, the term ‘wall of cattle’ has been used for such scenarios. But it seems more appropriate this year to say ‘tidal wave’, as numbers might keep building and building and eventually flood the market.

The warnings have been in place since the start of the year. But the market now faces the prospect of even larger supplies this summer than was forecast two months ago.

January feedlot marketings were insufficient for cattle feeders to stay current in their marketings, and this likely occurred in February as well. Fed beef packers are processing fewer steers and heifers than expected. The year-to-date total based on actual slaughter to mid-February was up only 44,000 head on the same period last year. The estimated total slaughter the week after that was, rather shockingly, below the same week last year. Carcase weight data and the record high percentage of cattle grading USDA Choice and Prime also suggest cattle are not being marketed on a timely basis.

“Analysts have warned all year that market-ready supplies have the potential to overwhelm the market this summer”

Concerns are growing that the front-end supply is about to increase significantly. Analysts have warned all year that market-ready supplies have the potential to overwhelm the market this summer.

This was before a bearish Cattle on Feed (COF) report issued Feb 23 that revealed larger than expected January placements. These will add to a front-end loaded on-feed total that was 8pc higher on February 1 than last year for feedlots 1000 head or larger. The COF report revealed that there were 14.006 million cattle in all US feedlots, up 7.2pc from a year ago.

The January placements will result in a contra-seasonal gain in front-end fed cattle supplies developing from June into July, says analyst Andrew Gottschalk,

The marketing rate needs to accelerate to prevent a serious backlog from developing. Failure to do so will likely result in fed cattle trading with the number ‘9’ as the first digit of cash prices (current prices are at US$126 per cwt). The fact that cattle slaughter the third week of February fell below year ago levels is the symptom of an illness which might have no cure, he says.

Front-end fed cattle supplies (cattle on feed 150 days or more) continue to trend consistent with prior estimates, says Gottschalk. Wishful thinking will not eliminate this trend. Only accelerated slaughter rates can reduce the degree of the buildup. By April 1, this category of cattle projects to be 31pc above year ago levels. However, these numbers and carcase weights a year ago were abnormally low. A better comparison is to use the previous five-year average, which shows the front-end supply to be down 1pc, he says.

However, the supply by May 1 projects to be 39pc above the prior year and 8pc above the previous five-year average. This accelerated buildup will continue into the summer.

Given the various limitations on slaughter capacity, it will be a challenge to meet projected weekly slaughter levels. As such, the fed cattle supply should become increasingly front-end loaded and will be record large on August 1 for that date, he says.

The COF report also revealed that the US has 28,209 feedlots, down 1010 from a year earlier. The total included 26,000 feedlots of less than 1000 head of capacity. Their numbers are not reported in USDA’s monthly reports. USDA estimated total feedlot capacity on Jan 1 at 17.2 million head, versus 17.3 million a year ago.

Record processor profits

Meanwhile, the US’s fourth largest beef processor, National Beef Packing, was another company to rack up record profits in 2017. In my Beef Central column last October, I noted that Tyson Foods’ beef segment rebounded from a loss in 2015 to big profits in 2016. Last year was even more of a blockbuster, as it had record operating income of US$885 million (for fiscal 2017 to Sept 30).

Results from National Beef were even more impressive. It harvests less than half the cattle Tyson does, but it reported a record US$512 million in EBITDA (earnings before income tax, depreciation and amortisation) in 2017 calendar year. This exceeded National Beef’s previous record set in 2016 by 17pc.

National’s record EBITDA makes it clear it had easily the best EBITDA per head performance in the industry. It surely made majority owner Leucadia National Corporation extremely happy.

National lost money three years in a row before making money again in 2016. With these two strong consecutive operating years in the books, Leucadia has now recouped almost 70pc of its original US$868 million investment made a little over six years ago, it said in a letter to shareholders and clients.

This year won’t be as profitable for US beef processors but National might make enough for Leucadia to recoup much of the rest of its investment.




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