Your Reading List

Packers Manage Margins

A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly

Kill capacity is now in much better balance with cattle numbers and beef demand

Packers have a new mantra. They are managing their margins instead of protecting their market share. And it’s helping them make money in 2009 despite the worst economic crisis since the Great Depression.

Beef packing has always been a spread business. Packers 20 years ago told me how they attempted to match the buy and the sell, i. e., the price spread between live cattle and boxed beef. But at times, the battle for market share outweighed the discipline required to manage the spread. One packer or another would bid up the price of cattle to put pressure on the others, or sell beef at a lower price.

The battle was particularly intense in the late 1980s when IBP (now Tyson Fresh Meats) opened a new plant in Lexington, Nebraska. It added 4,800 head of daily capacity and IBP did what it had to do to fill it. Every week was a battle for cattle. This was terrific for cattle feeders, who enjoyed a $3-4 per cwt “competition premium” for two or three years. Legendary IBP chairman Bob Peterson talked of ramping IBP’s cattle kill up to 12 million head from 10.5 million. How ironic that Tyson Fresh Meats has been the major packer to close plants. It removed 7,300 head of U.S. daily capacity over two years and sold its Alberta operations.

This means kill capacity is now in much better balance with cattle numbers and beef demand. Packers have also sharply reduced their Saturday kills. These averaged 19,443 head from the start of January to the end of July, excluding holiday weeks. This was only 14 per cent of maximum daily slaughter capacity. Only six normal Saturdays this year have seen kills of more than 30,000 head.

The Saturday declines reveal how packers have adjusted their operational strategies and how they are managing their margins. This is why steer and heifer slaughter levels in July and August were the lowest for these two months in many years. The contrast with 2008 levels was startling. Total U.S. slaughter in July last year averaged more than 678,000 head per week. It averaged just over 630,000 head per week this July. Slaughter levels in August were down by a similar amount.

Tyson’s top red meat executive, Jim Lochner, referred to these trends when he spoke with financial analysts at the start of August. Tyson (the largest beef U.S. packer in terms of sales and cattle processed) is running a significantly different beef business compared to a few years ago, he said. Daily capacity utilization has improved dramatically over the past two years and Tyson has reduced its operating costs, he said.

Lochner, who is senior group vice-president of Tyson Fresh Meats, said Tyson has been very careful during the current period of soft demand not to oversupply the pipeline, which would drive prices down. Its focus on execution continues to drive results, he said. His remarks came after Tyson announced its beef segment made $66 million in operating income in its fiscal 2009 third quarter ended June 27.

Lochner noted that capacity utilization at Tyson’s seven beef-processing plants was 87 per cent in the quarter. Interestingly, this percentage was based on five days, implying that Tyson no longer predicates utilization over a longer week. Tyson and other fed-beef packers have realized they can achieve similar production levels in five days that they previously spread over 5.5 days, because of increased efficiencies. Packers will have to continue to do this, and reduce their costs per head even more. The U.S. industry still has seven per cent overcapacity and this percentage will grow, without more plant closures, because of shrinking cattle numbers.

Cattle Buyers Weekly covers the North American meat and livestock industry. For subscription information, contact Steve Kay at P.O. Box 2533, Petaluma, CA 94953, or at 707-765-1725, or go towww.cattlebuyersweekly.com

About the author

Contributor

A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

Steve Kay's recent articles

Comments

explore

Stories from our other publications