The U.S. beef chain, from ranch to retail and restaurant, depends on consumers to keep paying up for beef. But seldom do all links in the chain make money at the same time. Right now, ranchers and cattle feeders are making excellent profits. But fed beef processors are not making any money and retailers probably haven’t so far this year.
This scenario has produced some trepidation among those on the production and processing side of the chain about how strong beef demand is and will be the rest of the year. That’s because continued strong demand will determine whether packers make money this year and how high live cattle prices will go as market-ready supplies of cattle tighten.
The annual grilling season began in May, a month that sees the best beef demand of the year. The month led to the Memorial Day holiday, which historically records the largest retail beef sales of the year. Because of retailers’ lack of margins on beef, the big concern pre-holiday was how aggressive their beef features would be and whether they would generate the sales seen in past years. Early reports last week indicated that beef sales were decent but not as strong as in previous holidays.
The second concern is how much retailers will raise their everyday beef prices in June. They did so in April when USDA’s average retail beef prices increased sharply from March. The Choice price averaged $7.75 per pound, up 11 cents from March. The All Fresh price averaged $7.33/lb., up 10 cents. The Choice price was up 1 cent from April last year while the All Fresh price was down 4 cents.
Another factor is that beef cutout values at the wholesale level are historically high versus the pork cutout. This has led analysts to speculate that retailers will turn to pork in June and feature it more than beef, as pork enjoys considerable competitive advantage in terms of pricing.
A third concern is how Americans will respond if retail beef prices work their way towards the record levels of October 2021. The Choice price that month averaged $7.90/pound, and the All Fresh price averaged $7.55/pound. Right now, it is unclear whether the anticipated reduced beef production in the second half of the year versus last year will push retail prices as high as in 2021.
Andrew Gottschalk of HedgersEdge.com expects retailers to continue to advance their average beef prices to restore their margins. Increases to date have been moderate, he says. Additional advances are likely post-Memorial Day, as significant amounts of beef were forward booked at lower prices to cover Memorial Day features. The potential for possible demand erosion remains the greatest risk to the overall positive supply-price outlook for the beef complex, he says.
Meanwhile, packers, especially those that process steers and heifers, face a somewhat bleak outlook in terms of profits. Fed beef processors are likely to have a tough time making money this year and next because of high live cattle costs and weakening beef demand. They might have their first loss this year or next year since 2015. That year saw the industry’s largest processor of fed cattle, Tyson Foods, have a beef operating loss of $66 million. Tyson for six months of fiscal 2023 had operating income of $166 million, all made in its October-December first quarter.
Tyson expects its beef operating margin for fiscal 2023 to be minus or plus 1%. JBS Beef North America reported an EBITDA loss of $23.2 million in its 2023 first quarter, versus EBITDA of $792 million a year earlier. The sudden deterioration in fed beef margins and the magnitude of their decline from a year ago have stunned industry analysts. Analysts are also struggling to reconcile the Tyson and JBS results with the positive fed beef margins of $89.50 per head reported by HedgersEdge.com for the first quarter. A number of factors appear to have been in play to cause margins to narrow significantly or disappear. The first is that cash live cattle prices have been significantly higher than boxed beef cutout values versus the same time last year.
Cattle prices the week before last averaged $177.94/cwt live or $284.36/cwt dressed. These were up 27-28% from the same week last year. The comprehensive cutout (cuts, grinds and trim) averaged $298.18/cwt. It was up 14.5% from the same week last year but it nowhere near covered the higher cattle costs.
Packers made so much money during the COVID-19 pandemic that they will get no sympathy if they lose money this year. But losses will mean reduced slaughter levels, which will mean pressure on feedlot marketings and live cattle prices that would not exist if packers were making money. — Steve Kay
(Steve Kay is editor/publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707-765-1725. Kay’s Korner appears exclusively in WLJ.)
