Converting cattle into beef has never been an easy way to make money. Beef processing involves the need for large amounts of cash, the vagaries of the weather, the possibility of a product recall and the headache of running a plant with enough workers. These and other factors apply to packers both in Canada and the U.S. Until recently, most had never experienced operating margins above one to two per cent.
Margins in the U.S. in 2015 were, in fact, negative. Tyson Foods, the U.S.’s largest processor of steers and heifers, had a beef operating loss of US$66 million, its first loss since 2006’s US$266 million. But it bounced back in 2016 with income of US$347 million, the same number as in 2014. These years revealed how dramatically financial performance can fluctuate from year to year.
Performance for fed beef packers improved dramatically in 2017 because of ample cattle supplies and growing domestic and export demand. Tyson Beef had record income of US$877 million and other packers likely had record years. Thus, the question at the start of this year was: “How can we top that?” To most people’s astonishment, this year’s results have been even better.
On November 13, Tyson reported results for its fiscal 2018 fourth quarter and full year that were eye-popping. It became the first beef processor in the U.S to make more than US$1 billion in a year. The segment reported operating income of US$1.013 billion for fiscal 2018 ended September 29. This easily surpassed last year’s record. It was also a stunning turnaround from 2015’s loss. The record profits meant it had an operating margin (income versus sales) of 6.5 per cent, versus 5.9 per cent in 2017. What’s more, Tyson is confident the business will repeat these numbers in fiscal 2019.
Tyson’s beef results reflected positive supply and demand fundamentals, and growth in value-added sales, notably case-ready sales. Its fourth quarter saw operating income of US$347 million, versus US$305 million a year ago. This was a record for any quarter. This was on sales of US$3.913 billion, versus US$3.808 billion last year. Margin at 8.9 per cent was a record for any quarter. It went against 8.0 per cent last year. Volume increased 3.4 per cent while average prices declined 0.6 per cent. Sales for the full year totaled US$15.473 billion, versus US$14.823 billion in 2017. Volume increased 3.1 per cent and average prices increased 1.2 per cent. All the volume increase came with an increase in the number of cattle processed. Tyson Beef processed 6.895 million head in 2018 and made $148 per head, according to my calculations. It processed 6.760 million head in 2017 and made $130 per head.
Tyson’s beef results were stronger than expected, driven by good cattle supplies, strong domestic demand and increased global demand, says president and CEO Noel White. In addition, Tyson has improved its performance relative to USDA benchmarks. Tyson’s beef export increases outpaced the industry, he told me. Tyson’s goal is to grow its value-added beef through case-ready and premium programs to help de-commoditize more of its business and reduce some of the volatility. With cattle supplies looking good next year and into 2021, it expects the beef segment to produce an operating margin above six per cent again in fiscal 2019.
Meanwhile, JBS USA Beef (which includes the U.S., Canada and Australia) reported earnings before income tax, depreciation and amortization of US$446.7 million for its 2018 third quarter. This was 10.3 per cent higher than a year earlier Q17 and represented an EBITDA margin of 8.2 per cent, up from 7.3 per cent last year. It appears all U.S. packers enjoyed record profits in 2018.