US beef packers profit on business changes, not plant closures

Although there has been speculation that the closure of Tyson's Emporia, Kansas beef slaughter facility helped to plump up the margins, market analysts said that action was strictly a coincidence. The move does, however, illustrate a change in the packers' mindset of how they do beef business, the analysts said.

"Coincidence does not establish cause," said Andrew Gottschalk, livestock market analyst at R.J. O'Brien and HedgersEdge.com, in an email. Gottschalk and others credit a series of managerial changes and market events with changing the fortunes of packers.

"Packers, after suffering severe and sustained losses, have better managed their margin as opposed to focusing on market share," he said.

Other market analysts said packers do not seem to be competing for market share as much as they once were. Managing for profitability with less emphasis on total market share now appears to be their business outline.

Troy Vetterkind, director of livestock analysis and trading at Vetterkind Cattle Brokerage, said the Tyson plant closing only helped packer margins in the sense that it did remove some old and redundant slaughter capacity. But he said drawing a straight line between the closure and industry profitability is difficult.

The shutdown just happened at a time when export markets began to expand, Vetterkind said. Domestic beef demand also grew, giving packers more markets for their production.

David Hales, market analyst at Hales Cattle Letter, said in an email: "Emporia happened to close just as the fed cattle supplies started increasing enough to prevent packer competition from pushing each other for fed supplies and thus pushing prices higher."

While Hales supports market coincidence for packer margins, he said others think Emporia's closing has created a less competitive market for Kansas cattle feeders. These traders contend it's one reason why Kansas feeders received $1 less for their cattle this week than those in Texas, he said.

John Nalivka, president of Sterling Marketing Inc., said two things have been major drivers in packer profitability, and one of them began developing before the Emporia closure.

The major event in Nalivka's mind is the rise in the so-called "drop credit." Basically, this consists of the value of everything that comes off the carcass at slaughter, including the hide and internal organs.

Rising export markets for US beef products help the drop credit since some foreign markets value items US consumers shun. Tongues and livers, for instance, are worth much more in some overseas markets than they are in the US

The drop credit reported by the US Department of Agriculture weekago was $11.97 per hundredweight on a live basis, which Nalivka calculated as about $153.71 per head. During the same week last year, the drop was $9.83 per hundredweight or $126.13 a head. In 2003, the last year of open beef exports before bovine spongiform encephalopathy, or mad-cow disease, was discovered in the US, the drop was $7.80 per hundredweight or $103.79 per head, he said.

Nalivka said that gains in US export markets have come largely because of the extreme weakness of the US dollar against other currencies. US products have become cheap in relation to other markets.

The second reason for packer margins to rise appreciably in the last few months was an increase in ground beef demand when lean beef imports have declined, Nalivka said. This demand is reflected in the market for beef trimmings, which were reported at $88.95 for 50 percent lean trimmings last week by the USDA. This compares with $55.63 for the same week a year ago and $54.53 for the same week in 2003, he said.

While it may be interesting to try and correlate the Emporia closing with positive packer margins, Nalivka said, it really is hard to do.

"I have them going positive (with their margins) before the plant closed," Nalivka said.