August 16, 2022

Drought in US portends tighter cattle numbers and end to record beef profits

The world's biggest meatpackers are signaling an end to record-high profits in the beef market as blistering drought in the United States means years of tighter cattle supplies.

Prices for beef soared to the highest ever in the wake of the COVID-19 outbreak that boosted demand for meals prepared at home even as slaughterhouses lost workers to the virus and struggled to keep up, resulting in supplies of cattle backing up on the ranch.

Now, extreme weather is reducing pastureland and boosting feed costs — forcing ranchers to shrink herds — and consumers are shying away from higher prices for steak in favor of cheaper cuts and alternatives like chicken. That's squeezed profit margins in the US beef sector to about US$137 per head of cattle, down from nearly US$1,000 a year ago, according to HedgersEdge LLC.

JBS SA, the world's biggest meat company, said beef profits were falling to a "new normal" while earnings in its US beef segment fell 55%.

"We are going to have less cattle next year," Andre Nogueira, president of North America operations, said on a call with investors. "How much less depends on how the drought continues or not." About 40% of the area where cattle is grown in the US is currently under drought, he said.

JBS' rival, Tyson Foods Inc., reported a volume decline in beef sales for the first nine months of its fiscal year while prices for beef slipped 1.3% in the quarter.

Marfrig Global Foods SA, another beef giant based in Brazil, also sees US consumer beef demand hurt by inflation. Consumers are likely to favor ground beef instead of barbecue cuts for Labor Day holiday, according to Tim Klein, the chief executive officer at National Beef, one of the largest US beef producers. While overall demand remains good, there's a trade down from premium to cheaper cuts.

Cattle supplies are seen as "adequate" for US beef production capacity in the second quarter, but prices are already rising. Higher costs and lower domestic prices reduced spreads for the whole US beef industry by 22% in the second quarter compared with a year earlier, according to data from the United States Department of Agriculture cited by Klein during Marfrig's conference call.

"Earnings will decline, but we'll see healthy margins for the rest of the year and 2023 as well," he said.

- Bloomberg