John Nalivka: Profits for every sector of the red meat and livestock industry
June 2, 2017
As a general statement, the beef industry is profitable. The same is true for the pork industry. While my margin assessment is judged against only variable costs and inclusion of long term debt would show a different result, the current situation is both quite remarkable and encouraging. This is particularly true considering the outlook six to eight months ago.
Breaking it down, we find that cow-calf operations are likely to realize per head operating profits this year ranging around $100 per head. This compares to my projection last fall of breaking even to losing money. This projection is the result of both higher-than- expected calf and feeder cattle prices as well as lower-than-expected costs of production. Again, long term debt would change this estimate.
At the same time, feedlot margins have also been very positive throughout this year. This is largely the result of sharply lower breakeven prices this year resulting from lower feeder cattle prices when cattle were placed on feed last year. While the cost of cattle placed on feed has the greatest impact on the breakeven (70 percent – 75 percent of the total cost), grain prices have also been lower. Feedlots have not only been rewarded by lower breakeven prices coming into the year, margins have also been bolstered by higher finished cattle prices resulting from strong demand coupled with a very current feedlot situation since the beginning of the year. The end result is feeding margins ranging from $100 per head at the beginning of the year to $500 per head in May. The average of my weekly estimated in Sterling Profit Tracker year-to-date is $365 per head. Positive feeding margins will be sustained through the end of the year by lower breakeven prices assuming the positive margin is bid into the feeder cattle which I do not expect.
Downstream at the packing plant, operating margins year-to-date have averaged about $80 per head and about equal to a year earlier. While Choice steer prices year-to-date have averaged $127 per hundred weight and down 5 percent from $133 per hundredweight a year earlier, the Choice cutout has averaged $212 per hundred weight, down 4 percent from $221 per hundred weight a year ago.
The industry has benefitted from solid quality grading performance (YTD averaging 83 percent Choice), strong export demand (YTD +22 percent from year earlier), and stronger-than-expected U.S. consumer demand. Though prices are far from the highs seen in 2014 and 2015, there is greater balance across all sectors of the industry with the end result is profitability across the industry.