BEEF & PORK PACKER MARGINS

Margins for beef and pork packers have eroded in recent weeks and are well below a year ago. Of course calculated margins do not include all the other costs (labor, transportation, deprecation, etc.) that must be covered in order to make a profit. Still, it is clear that in recent weeks, shrinking beef packer margins have translated into unprecedented red ink in terms of profitability. LMIC’s estimated packer margins are the price spread or difference between what typical packers pay for an animal and the wholesale value of meat plus the estimated byproduct value (hide, variety meats, etc.). All those values are based on reports made available by USDA’s Agricultural Marketing Service. In 2012, tight packer margins will provide a significant headwind to fed cattle prices and to a lesser extent limit increases in slaughter barrow and gilt prices.

LMIC estimated that the beef packer margin or price spread in December 2011 was about 3% below a year earlier. By most estimates, beef packer profits during December 2011 were in the red. For the first three full weeks of 2012, that margin collapsed averaging 40% below 2011’s. During the first three weeks of 2012 margins declined each week as live fed cattle prices increased about $5.00 per cwt. and the wholesale boxed beef value dropped nearly $10.00 per cwt. In the wholesale market, beef buyers have not been willing to compensate packers for high cattle prices. Looking ahead, beef packer margins will likely improve seasonally as Spring approaches, which is normal, however their margins are forecast to remain below 2011’s at least into the Summer quarter. Red ink will force packers to evaluate their plant efficiencies and suggests elimination of the most unprofitable plants.

Pork packer margins have eroded but the financial stress will be modest compared to the situation for beef plants. Still, expansion plans will likely go on-hold. Pork packer margins remained in the black during late 2011 but in December were estimated to be about 12% below a year earlier. For the first three weeks of 2012, those margins averaged about 30% below 2011’s. But that timeframe in 2011 was very profitable, 2012’s results will be much different.