After the flames of the Tyson plant fire, packers have been seeing green. Lots of it.
Last week saw per-head packer margins hit record levels. By Thursday last week, they had hit a high of almost $440 per head.
Very simply, the per-head packer margin is what packers make on average, per animal, less what they paid for it. When cattle prices go down and beef cutouts go up, margins go up. This is what happened last week and the week before following the fire and shuttering of the Tyson plant in Holcomb, KS.
On the day before the fire—Thursday, Aug. 8—fed cattle were trading $114-115 (average $114.10) live and $180-185 ($182.60) dressed. The Choice cutout was $216.88, an area where it had struggled to hover for a while. For that week (Aug. 5-9), Hedgers Edge estimated the weekly packer margins at $142.42/head. At the time, that was relatively impressive.
Following the fire, the cattle futures—and cash cattle as a result—plunged on Monday, Aug. 12 and the cutouts began to skyrocket. It continued that way for most of that week. For more in-depth information on the fundamental fallout of the fire, see Dr. Darrell Peel’s analysis.
Though cash fed cattle and cattle futures had done a lot of recovering since then, Choice cutouts topped last week at $241.74 on Wednesday. Packer margins hit $439.85 on Wednesday and Thursday based on conservative estimates by Hedgers Edge.
While these changes were spectacular, numerous things led us to this point. In general, they boil down to demand factors and supply factors.
Demand for beef
“The market is the market, and the market did what it did last week on panic and fear,” Steve Kay, author of the Cattle Buyers Weekly market newsletter and WLJ columnist, told WLJ on Wednesday, Aug. 21.
Some of that panic and fear was from beef buyers “who were short-bought for the Labor Day holiday,” according to Kay. Economics 101 says sudden demand for a product without relevant increases in supply will increase the price. So, cutouts increased.
Kay projected that the cutouts will likely retreat once the Labor Day holiday beef buying ends. He expected that would happen quite soon, either at the end of last week or this week.
Andrew Gottschalk of Hedgers Edge described what he saw as the beginning of that on Thursday, Aug. 22.
“The sharp rebound in beef cutout values is beginning to slow, as the pipeline fills. A price decline into the second half of September is expected for the Choice cutout. Any retreat in prices will likely be limited, given reduced weekly beef production (still a concern from the fire at the Holcomb plant).”
Gottshalk had earlier described the behavior of retailers in a way that might also limit the cutout declines.
“Retail beef margins were near a record high level prior to the surge in beef cutout values,” he noted on Tuesday, Aug. 20. “As such, it is likely they will continue to promote beef aggressively, despite the short-term surge in beef cutout values.”
Supply-side logistics
On the supply side, packer reactions after the fire—together with the futures reaction—also had an impact on cash fed cattle prices. During the week following the fire, packers relied more heavily on formula and forward contract cattle and bought fewer cattle on the open negotiated cash market. This can depress prices or keep them lower.
“What the packers did was—understandably, because of the momentary crisis about enough capacity—they promised shackle space to their formula cattle and those who sell on formula and forward contract,” explained Kay.
“They’re trying to honor the commitments already made by cattle feeders who have been selling formula to them.”
The CME Daily Livestock Report (DLR) noted on Wednesday, Aug 21, that the supply of forward contracted cattle has increased, “but so has the supply of fed cattle in feedlots and overall slaughter.”
“So rather than simply focusing on the absolute numbers, it is appropriate to look at forward contracted share of the total supply coming to slaughter,” DLR noted.
At 56,681 head of domestic, forward-contracted cattle slaughtered during the week following the fire represented 12.1 percent of all cattle reported to USDA under the Mandatory Price Reporting (469,779 head) for that week. The comparable week last year saw the supply of forward contracted cattle relative to total at 6.3 percent. Similarly, the week following the fire saw 307,992 head of formula cattle, representing 65.5 percent of total, compared to 61.5 percent the same time the year before.
“The share of forward contracted cattle has increased from last year, but it is still in the range of the last five years,” noted DLR, adding that increasing demand for certainty (i.e., forward beef bookings) from end users makes this trend make sense.
“More cattle contracted on a forward basis than last year and tighter packing capacity could limit the upside in the cattle market this fall,” DLR continued. “Ultimately, however, it will be the cutout and the willingness of retailers to continue to feature beef this fall that will determine the direction in the cattle market.” — Kerry Halladay, WLJ editor
