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Expectations for Profitability Mixed

Higher cattle and beef prices don't necessarily equate to greater profitability for all sectors of the supply chain, says CattleFax analyst.

by Troy Smith for Angus Journal

 

TAMPA, Fla. (Feb. 8, 2013) — Cattle producers attending the 2013 Cattle Industry Convention in Tampa, Fla., heard market forecasts for higher cattle and beef prices, but expectations for profitability were mixed. During the CattleFax Annual Outlook Seminar, market analysts said profitability could vary among industry segments. The outlook is not rosy for beef retailers, packers or cattle feeders. Profitability for stocker and cow-calf producers could depend on drought’s effect on each operation’s input costs.

 

CattleFax’s Randy Blach said food retailers are “featuring” beef less often, as margins have been squeezed. Both grocers and restaurants will struggle to increase profits in 2013. The reason is a decrease in domestic demand as a result of decreased real income among consumers. Prices for pork and poultry were up, but beef prices increased more. Price resistance suggests consumers are keeping tighter grips on their wallets.

 

That would pressure beef and cattle prices lower were it not for increased sales of U.S. beef abroad. Blach said the value of exports contributes $280 per head to the value of a finished steer. In the current environment, that doesn’t necessarily translate to profitability in all of the beef business.

 

“The cattle feeder, the packer and the retailer didn’t make any money. They’ve been pushing up against a price ceiling for several months,” said Blach. “It’s been a little tough for margin operators.”

 

Blach said the beef industry faces a continuing struggle with excess capacity in the beef-packing and cattle-feeding sectors. Excess packer capacity reached 15% in 2012, resulting in the lowest margins in five years and forcing the closing of a Plainview, Texas, packing plant. Blach said there could be more plant closings, followed by contraction in the feeding segment.

 

“We estimate a 25% to 30% excess in cattle feeding capacity. Cattle feeders are chasing a declining supply of feeder cattle. Losses in the feeding segment were nearly $100 per head in 2012, assuming no risk management,” added Blach. “And there’s a high probability of feeding losses during the coming summer.”

 

According to Blach, prospects for high feeder-cattle prices are good, and that bodes well for stocker operations. However, they are margin operators, too. Profitability could be hard to achieve if drought continues to affect availability and costs of grazed and harvested forages. Some cow-calf operators may be in the same boat. If their feed situation is good, cow-calf producers are in the driver’s seat and should be profitable in 2013.

 

Blach said drought relief would aid chances for everyone. Persisting drought will likely lead to more contraction within the beef herd and continuing high prices for feedstuffs. However, numbers indicate that producers in some areas of the country are expanding. The Pacific Northwest and Northern Plains were cited as regions where increased heifer retention and cow herd expansion are evident. It shows what a difference adequate precipitation makes.