Strong demand for U.S. beef at home and abroad continues to provide beef processors with large margins and help prop up live cattle prices. That’s all the more remarkable as the beef industry has just come through its two weakest demand months of the year.
The dramatic increase in packer profits began in 2017 and continued last year. Profits have been on their upward trajectory for four main reasons. First and foremost, demand for U.S. beef at home and globally has improved sharply each year. U.S beef exports in 2018 broke both the previous value and volume record.
The second factor is that the increased demand has come as U.S. cattle numbers and beef production have increased year on year. Production totaled 26.187 billion pounds in 2017 and 26.863 billion pounds in 2019. USDA forecasts that 2019 production will total 27.3 billion pounds. That’s a perfect storm for beef companies—more beef to satisfy growing demand.
USDA data confirms that retail beef demand in the U.S. remains strong, driven in large part by a positive employment picture. USDA’s All Fresh Beef retail price averaged $5.74 per pound in February, up 3.4 percent on February last year. The retail Choice beef price averaged $5.90 per pound, up 1.2 percent. This came after similar year-on-year gains in January. Retail sales in March were also stronger than expected, even though it is the weakest demand month of the year.
The third factor is that plant closures after the severe 2010-2012 drought that cut cattle numbers has sharply reduced total daily slaughter capacity. It fell from 139,000 head per day in 2010 to 125,500 head per day by 2016, according to my calculations. Moreover, the lost capacity has not been replaced even though cattle numbers increased by nearly 5 million head from Jan. 1, 2015 to Jan. 1 this year. So, plant utilization rates have increased significantly, which reduces packers’ slaughter and processing costs on a per-head basis.
The fourth factor is that packers continue to produce more added-value products, which have a higher value than so-called “commodity beef.” Allied with this trend is the fact that cattle are grading a record-high percentage of Prime and Choice. A record 83.02 percent of all cattle graded Prime or Choice the third week of January and the percentage has remained close to this level since then. That’s a remarkable number, given that many cattle have endured tough winter and feedlot conditions since last December. These conditions have accelerated the downturn in weekly steer and heifer carcass weight but have not impacted quality grading at all.
These factors and others produced record profits for all processors of grain-fed cattle last year. Largest processor Tyson Foods in 2018 did what seemed impossible only a few years ago. It became the first beef processor in the U.S. to make more than $1 billion in a year. I calculate that Tyson processed 6.895 million head in fiscal 2018 and made $148 per head. It processed 6.760 million head in 2017 and made US $130 per head.
It continued to rack up the records in the Oct.-Dec. quarter, its fiscal 2019 first quarter. The segment had operating income of $305 million, a record for the quarter and its third best quarter ever. The record also meant the business had operating income of $1.063 billion in calendar 2018. Beef’s operating margin in the quarter was 7.8 percent and Tyson believes its margin will be near 7 percent in fiscal 2019. This would have been unheard over 20 years ago when fed beef processors struggled to have operating margins above 2 percent.
Not to be outdone, second largest processor JBS USA Beef (which includes Australia and Canada) turned in a record performance in 2018 as well. Its 2018 EBITDA (earnings before income tax, depreciation and amortization) was $1.7 billion, with an EBITDA margin of 8.0 percent, compared to 6.0 percent in 2017. No other companies report results but fourth largest processor National Beef Packing in 2017 made a record $407 million in income before taxes. This was a $126-per-head profit.
Tyson and JBS will not publish their January-March results for another month or so but they will likely be eye-popping. Margins averaged a positive $71 per head in the quarter. This far exceeded the previous quarterly record of $30.53 per head set in 2010, according to HedgersEdge.com. By its numbers, the quarter since 1991 has seen margins negative 13 times and positive 13 times.
These margins helped push live cattle prices higher than forecast at the start of the year. Forecasts from USDA and five industry analysts were for prices to average $120.58 per cwt. They actually averaged $5 more than that and had the same average as the first quarter last year. Strong beef demand not only boosted packer margins to record levels. It helped hold up cattle prices when they were expected to decline. — 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.)
