North American beef processors are enjoying an extended period of profits that is unprecedented in the industry’s history. Packers on both sides of the border are seeing margins that would have been unthinkable five years ago. U.S. packers racked up record profits in 2017, surpassed them in 2018 and are on track for more records this year.
Strong demand for U.S. beef at home and abroad is the driver that continues to provide U.S. beef processors with large margins and helps prop up live cattle prices. This was all the more remarkable in the first quarter as the industry came through its two weakest demand months of the year (February and March).
Profits have been on their upward trajectory since 2016 for four main reasons. The first is demand. U.S beef exports in 2018 broke both the previous value and volume record. The second is that the increased demand has come as U.S. cattle numbers and beef production have increased year-on-year. Production totalled 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.
The third factor is that plant closures after the severe 2010-12 drought that cut cattle numbers 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 numbers. Moreover, the lost capacity has not been replaced even though cattle numbers increased by nearly five million head from January 1, 2015 to January 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 value-added products, which have a higher value than commodity beef. Allied with this is the fact that U.S. cattle are grading a record high percentage of Prime and Choice. A record 83.20 per cent of all cattle graded Prime or Choice the last week of March. That’s a remarkable number given that many cattle endured tough winter and feedlot conditions from last December into March.
These factors and others produced record profits for all processors of fed cattle last year. The largest processor, Tyson Foods, in 2018 became the first beef processor in the world to make more than US$1 billion in a year. It has continued to rack up the records since then. Tyson believes its operating margin will be near seven per cent in fiscal 2019. This would have been unheard over 20 years ago when fed beef processors struggled to have operating margins above two per cent.
The 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 US$1.7 billion, with an EBITDA margin of 8.0 per cent, compared to 6.0 per cent in 2017.
Tyson and JBS will likely publish their January-March results this month and they will be eye-popping. Margins averaged a positive US$71 per head in the quarter and far exceeded the previous quarterly record of US$30.53 per head set in 2010, according to HedgersEdge.com data. I’m told that packers in Western Canada in the first quarter were making $150 per head at times and not less than $70-80 per head.
These margins helped push live cattle prices higher than had been forecast at the start of the year in all markets. Strong beef demand not only boosted packer margins to record levels. It helped hold up cattle prices when they were expected to decline.