Tyson Foods’ Beef Margins Improve From Fatter Cattle ‘Predicament’

Fewer and fatter cattle at U.S. feedlots are not fattening profits for feedlot owners, but packers and food companies like Tyson Foods are seeing a drop in cattle prices which could result in lower beef prices for consumers.

Declining cattle supplies pushed feed lots to fatten up cattle during the past year in hopes of yielding more beef, according to Derrell Peel, beef cattle analyst with Oklahoma State University. He said the September cattle report from the U.S. Department of Agriculture (USDA) showed August placement at 95% of last year. He said it’s the lowest August placement level since 1996.

Beef markets and packer margins have responded positively as the placement total was short of the market estimates. However, lower placements are not providing much help for fed cattle markets, according to Peel.

FEEDLOT PREDICAMENT
Feedlot placements the past six months are down 3.5%, with 349,000 less head than the 2014 March through August period, according to Peel. Despite the year-over-year decline, the Sept. 1 on-feed inventory rose 2.7%, up an additional 227,000 head more than a year ago. Peel said there is a growing glut of larger cattle that feedlots are having a tough time selling given their added weights which is causing a “predicament” for feedlots – the middle man in the beef supply chain.

Steer carcass weights for the year to date into early September were averaging 19 pounds heavier than last year, Peel said.

“By the last week of August, average steer carcass weights were at 906 pounds, equal to the record weights last November. One week later, moving into September, steer carcass weights jumped to 914 pounds, a new record and up 25 pounds year over year on a weekly basis,” Peel said. “Carcass weights often peak seasonally in the fourth quarter which could push annual average steer carcass weights 20 pounds or more over last year.”

Peel said fed cattle prices dropped roughly $4 a hundredweight last week. After holding between $145 and $150 per hundredweight for the summer, the fed market has dropped at least $10 per hundredweight in the past three weeks; pushing the apparent summer lows into the fall.

“The fed cattle market has turned ugly and the only real fix at this point is to take our lumps; cough up the heavy cattle; and likely make the market even uglier for a period of time,” Peel said.

He anticipates the fourth quarter fed cattle market improvement may be mostly or entirely wiped out if they continue to market excessively heavy cattle through the remainder of the year.

“The only real solution is to market our way out of this predicament. You can’t rely on lower placements to fix the problem; placements are already low and have been for many months. Moreover, growing feeder supplies indicate that placements will begin increasing in the coming months,” Peel said.

While abruptly flushing heavy cattle out of feedlots looks like the only alternative, he’s not sure it will bring feedlot owners positive margins in the fourth quarter.

PACKER CHALLENGES
Peel told The City Wire that packer margins – Tyson Foods – are positive again in part because they are getting better prices on harder to move cattle. But the caveat to this dynamic is these now fatter cattle are becoming too large for many slaughter and processing facilities. He said they also yield far more fat trim which is driving down those prices. On the flip side, Peel said larger cattle also produce more “prime” cuts with better grading and marbling which is being passed on to consumers at retail and finer steakhouses.

“In the past three to four weeks packer margins have improved pretty nicely after a tough go of it most of this year,” Peel said. “Packers still face an overall tight supply of cattle, particularly in some regions.”

He said packers went along with feedlots overfeeding cattle for the past year in hopes of making up some of the shorter supply. Year-to-date cattle slaughter is still down 6.6% but beef production so far this year is down only 4.3% with increased carcass weights making up the difference.

Peel said there are incentives for packers to buy up this fatter cattle now, if they can physically manage the processing, but the heaviest of them are simply to large for typical slaughter facilities. He said packers had their first experience with heavy cattle last fall when feedlots begin pushing them though the pipeline. Peel said some packers experienced line shutdowns averaging 30 minutes or more when carcasses would get stuck. He said some of the cattle were too long for the standard hooks and the carcass touched the ground which is a food-safety “no-no.”

Peel said packers still face softer exports from the higher U.S. dollar amid slowing Asian economies and there is no evidence that will soon abate. Seasonally, packers are moving through what is typically their softest period for domestic demand. He said it looks like there will be more beef on the market in the coming months given the heavier weights of the fed cattle placements. Anecdotally, he’s heard that some retailers like Costco are discounting “prime” cuts of steak for the going rate of the lower quality “choice” cuts, simply because there is more of it from heavier cattle.

TYSON OUTLOOK
Tyson Foods said recently it expects the beef woes to pass this year. Through three quarters of fiscal 2015, Tyson’s beef sales have totaled $12.826 billion, which is nearly 42% of the company’s total revenue. A year ago beef sales were $11.748 billion, or 43% of the company’s total revenue.

While beef fattens top line sales, the bottom line operating profits tell another story. In that same nine-month period Tyson’s beef segment lost $33 million with a net operating margin of negative 0.2%

Tyson’s total operating income through three quarters of this year was $1.619 billion. Of that, $996 million came from the company’s chicken segment, which had an operating margin of 11%.

Tyson reported increased live cattle costs of $215 million in the recent quarter, compared to a year ago. For the nine-month period, live cattle costs have escalated by $1.4 billion for Tyson Foods.

Tyson Foods CEO Donnie Smith said last month he is confident the company can manage it’s way through the industry challenges and believes in the longterm viability of its beef business. Tyson execs expect their beef segment will perform a little better in fiscal 2016, which begins Oct. 1.

Peel said Tyson is going to have enough cattle to slaughter, but export demand is likely to remain soft which could mean lower boxed beef prices on the horizon.