High cattle prices weigh down packer margins, consumer demand holds

It’s a good time to be a cattle farmer or a feedlot operator as prices for feeder calves and fed cattle continue to rise while grain prices decline. But that typically means red ink for packers like Tyson Foods and Cargill and higher beef prices for steak and burger-loving consumers.

The price of 475-pound, medium and large steers in the Midwest have averaged $281.81 per hundredweight the past six weeks, according to Derrell Peel, livestock marketing specialist with Oklahoma State University.

He said this includes the latest weekly average price of $294.80 per hundredweight at the seven federally reported auctions in Oklahoma. This price compares to an average of $183.15 per hundredweight in late September and early October one year ago. Prices are up 54% from a year ago with fed cattle bringing nearly $100 more per hundredweight over last year, Peel said.

“So far this fall, prices have shown no seasonal tendency to decrease from September to October and, in fact, the most recent price is the highest in the six week average,” he added.

Peel expects cow-calf producers will sell weaned calves this fall for record revenues by a large margin. He said revenues are up $500 to $550 per head over last year and will, in the majority of situations, receive record profits, at least on a per head basis. In some drought areas, Peel said total ranch profits may not be up as much due to reduced animal numbers.

“The market is begging for animal numbers so selling calves at weaning is a very profitable strategy now,” Peel said.

Despite the favorable selling conditions, Peel expects some cattle will be held back given the cost to feed is now lower with cheaper corn prices. He doesn’t expect the seasonal pressure on prices between October and November to be as strong as usual given the lower overall supply numbers.

PACKER PRESSURE
Beef packers like Tyson Foods rely on cattle purchases from feedlots for their slaughter and processing orders. Feedlot profit margins are up $138 per head from this time last year to $227.50 per head as of last week. Cash prices for live cattle averaged $163.96 per hundredweight last week, that’s up 28% from a year ago, according to Sterling Beef Profit Tracker.

Feeder cattle ready to slaughter also rose last week $243.58, a more than $81 per hundredweight advantage compared to feeder prices at this time last year. Higher fed cattle prices continue to pinch packer margins averaging losses of $41 per head last week, according to Sterling Beef Profit Tracker. 

Beef cutout prices increased $7 last week, to $243.34 per hundredweight. While packers expect tight to negative margins this time of year, the losses are not as great as the $65-per-head deficit a year-ago, Sterling reports.

The U.S. Department of Agriculture notes in its Oct. 17 report that despite record retail beef prices, meatpackers are caught between high fed cattle prices and cutout values too low to generate positive packer margins.

High U.S. cattle prices are drawing more animals across the border and imports are up 13% from a year ago. In August, the USDA reported that U.S. beef imports grew 46% from the same month in 2013. At the same time demand for U.S. beef exports has slowed during the late summer months. 

Peel told The City Wire that higher beef imports have helped to moderate the rising costs of ground beef in the U.S. though the summer. He said processors blend lean beef imports with 50% to 60% lean beef trimmings from normal slaughter remains to get the 80% or higher lean beef products sold at U.S. grocery retailers. He said the low U.S. cow slaughter numbers in the U.S. have also fueled the need for more imports to keep up with domestic hamburger demand.

CONSUMER IMPACT
Grocery shoppers are seeing record high beef and other meat prices at their local supermarkets and a recent USDA report predicts meat prices will rise 6.5% by the end of this year. They widened their forecast from 5.5% in August and it’s well ahead of the 20-year 2.9% range.

Beef and veal prices were revised upward to 8.5% gains, pork is slated to jump 8% and poultry prices on average are up 3.5%

Consumers paid an average of $4 a pound for 100% ground beef in August, up 55 cents from the same month in 2013, according to the Labor Department’s Bureau of Labor Statistics. Prices are expected to go higher toward year-end.

“We weren’t so much surprised that we had to raise (beef prices) as we were that demand has remained relatively high for beef,” said Annemarie Kuhns, an economist with USDA’s Economic Research Service who compiles the report. “Typically, you see a bit of consumer push-back that would ease the demand for the limited supply.” 

Grocers across the states have raised prices on 80% ground beef by $1 a pound over last year. Peel said many grocers and restaurant owners have yet to fully pass through the higher costs to consumers which he believes will subsist for at least two more years.

“We don’t know how high beef prices are going to go. We are in some uncharted waters in terms of historically low supplies that will be with us to 2017. Packers around the country tell me they are surprised at the resiliency from consumers who are still buying beef. We don’t know how much more consumers are willing to bear,” Peel said.

The substitution play from beef to lower priced meats like pork and chicken has not materialized to the extent many believed, he said.

“I think those lower income families moved away from beef in 2009 and 2010 following the recession. But, there has not been much digression since then. The beef market is being supported by consumers with a high preference for beef cuts. They may be eating  fewer steaks and more chuck but they want to have beef in their diet. We’ll have to see if that demand stays up when prices move higher,” Peel said.