Packer margins shrink

Consumers unwilling to pay higher prices for beef; packers reduce kills

By CAROL RYAN DUMAS

Capital Press

A tight cattle supply and consumer resistance to higher beef prices is causing grief for packers, according to market watchers.

Cash cattle prices last week in Kansas were $123 per hundredweight and $124 per hundredweight in Nebraska. But the retail price of beef equates to $116 per hundredweight, and packer breakeven is about $117 per hundredweight, said Bob Wilson, broker and analyst with HedgersEdge, an agribusiness information service in Denver.

Cash cattle prices are going up, but consumers aren't willing to pay higher prices for beef, and packers are caught in the middle, he said.

"We're pricing ourselves out of the market," he said.

Packers suffered record losses in January. They were losing as much as $106 per head on a daily basis, he said.

With pork margins shrinking as well, beef and pork packers lost about $150 million in the last week in January and the first week in February.

Given the economic concerns consumers have with gasoline prices rising and the availability of other proteins, it's not a pretty picture, he said.

"Obviously if the consumer doesn't come to the market, we need less capacity," he said

Beef packers are reducing their kills, from a weekly average of 635,000 to 650,000 to 589,000 last week, 608,000 the week before and 619,000 the week before that, he said.

But that brings its own consequences. If packers are able to slow kills, tighten up supply and raise wholesale prices, it pushes the burden of loss to retailers.

"A retailer is going to be a lot less accommodating than a packer," he said.

If a retailer is losing money on beef, he'll raise the price but lose volume. He'll also stop advertising beef specials and promote chicken, fish and pork, he said

The beef industry went through a similar situation in the late '70s and early '80s, pricing itself out of the market. It took 15 years to price back in, he said.

The Livestock Marketing Information Center estimates margins collapsed in the first three full weeks of 2012, averaging 40 percent below the same period in 2011. Margins declined each week as live fed cattle prices increased about $5 per hundredweight and the wholesale boxed beef value dropped nearly $10 per cwt.

Looking ahead, beef packer margins will likely improve as spring approaches, which is normal, but margins are forecast to remain below 2011 at least into the summer quarter.

"Red ink will force packers to evaluate their plant efficiencies and suggests elimination of the most unprofitable plants," according to LMIC.

Pork packer margins have also eroded, but the financial stress will be modest compared to the situation for beef plants. Pork packer margins fell out of the black in December and were about 12 percent below a year earlier.

For the first three weeks of 2012, those margins averaged about 30 percent below 2011. But that timeframe in 2011 was very profitable; 2012's results will be much different, LMIC reported.