Margin prospects 'better for beef packers than pork processors'

27.03.2017

Margin prospects look better for US beef processors than their peers in pork, where profitability will be held back by the boost to competition for hogs from fresh packing plants, MetLife Agricultural Finance said.

Prospects for US meatpackers in both sectors should be promising this year, given the trend for them to thrive in periods of expanding volumes.

"As farmers expand their herds in response to a period of above-average profitability, a greater supply of animals enter the system and allow downstream segments, like packers and retailers, to capture a larger share of every retail dollar," said MetLife, a major agricultural insurer.

"The opposite tends to occur during periods of declining animal numbers."

Capacity factor

And with US beef output to rise by 4.1% to 26.25bn pounds this year, and pork production by 4.3% to 26.11bn pounds, according to the US Department of Agriculture, this would "suggest that processors will continue to capture a greater share of every retail dollar".

However, this dynamic will "not hold true for pork", MetLife said, flagging the impact of new processing plants from the likes of Seaboard Foods and Triumph Foods, which are forecast raising industry capacity by 6% by the end of this year compared with 2015 levels.

This implies more competition for animals to process, underpinning hog prices.

"Greater slaughter capacity will likely return leverage back to the producer, impacting the share of retail pork prices captured," MetLife said.

However, with "no prospect" of an increase in beef packing capacity, an industry which has seen plant numbers decline in line with shrinkage in the US herd, "beef processors will likely retain a greater share of retail beef prices in 2017".

Contrasting evidence

Such talk will be reassuring to beef packers, which actually saw a weak start to 2017, when their margins shrank, pressed by recovering cattle values at a time of stagnant beef prices.

US beef and (pork) processor's falling take, as % of retail value

February: 5.9%, (17.4%)

January: 7.2%, (20.4%)

December: 9.9%, (22.5%)

November: 9.2%, (23.2%)

October: 11.0%, (21.2%)

September: 10.6%, (21.1%)

Source: USDA
The proportion of the retail beef price captured by processors fell to a 16-month low of 5.9% in February, well below the eight-year high of 11.5% recorded in June, on USDA data.

For pork, the proportion of retail value taken by packers also fell last month, but to a relatively high 17.4%.

While below the high of 23.2% recorded in November, that is nonetheless amongst the highest levels seen since the early 1980s.

Strong import demand for the meat from China is seen as having supported pork processing margins against rising US output.

'Very tight'

More information on dynamics in the beef industry will be revealed later, with monthly USDA data on cattle on US feedlots, expected to show a drop of 1.2% in placements in February, according to Urner Barry.

Forecasts for USDA cattle on feed report, March 24

On feed, March 1: 100.1%, (10.781m head)

Range of estimates: 99.1-100.8%

Placed on feed during February: 98.8%, (1.689m head)

Range of estimates: 94.0-103.5%

Marketed during February: 103.5%, (1.647m head)

Range of estimates: 102.5-104.0%

Data given as % of year-ago figure, and implied headage figure

Source: Urner Barry

"Placements in the November‐January period increased by some 700,000 head relati

ve to a year ago, and that likely has caused some analysts to expect a bit of a pause in placements during the month of February," said Len Steiner at Steiner Consulting.

The number of cattle marketed by feedlots last month, by contrast, is seen up 3.5% year on year.

Indeed, the "front end cattle supply remains very tight," Mr Steiner said, estimating that the number of cattle on feed for longer than 120 days, as of March 1, was down 16% year on year.


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