November 5, 2008


US beef packers reduce production as margins remain negative


US beef packers are looking forward to the passing of Thanksgiving as beef demand declines amid growing demand for competing proteins such as turkey, said HedgersEdge analyst Andy Gottschalk.


Gottschalk said packers will be reducing production hours this week as margins remains negative. HedgersEdge, an agribusiness market research firm, calculated beef margins at negative US$34.89 per head last week. Processors are losing money due to weak beef demand.


David Hales, president of cattle futures trade specialist Hales Trading Co., said packers are asking for higher prices as they try to make up for damaged margins.


Domestic demand is down at mid- and low-level restaurants, while top-notch restaurants have also suffered, with significant decline in sales. Meanwhile, retail activity slowed from August through October, a period in which cutout values dropped to the low of US$140s from the mid US$170s, noted Gottschalk.


Hales attributed the decline in cutout values over the last three months to beef being overpriced as consumers shifted from steak cuts to ground products.


He said that retailers, distributors and wholesalers are not willing to own inventories under the economic conditions and that is keeping the packer on a defense.


The rising value of the US dollar forcing drop credit to decline also contributed to the bad margins, which is costing packers some US$25 per head from highs and the dollar is also hurting exports as well.


But with a sharp decline in beef cutout values, retail beef margins are now maximized. Once Thanksgiving passes, retailers will begin to reduce their everyday prices or aggressively feature beef, leaving either action to encourage consumers to consume more beef.


He added that dropping gas prices also should help boost beef demand as consumers reallocate related savings to other purchases.

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