Number of packers: Following my last column (prompted by an email about cash trading), I received an insightful question about new packaging facilities and the potential impact on market structure: “…is it the amount of cash trading by a static number of packers that matters, or is it the amount of cash trading by an increased number of packers that matters?”
The question immediately made me think of a column by Greg Henderson from a few years ago: Packing Plant Fool’s Gold.
Fool’s Gold: Henderson essentially addressed the same question: “Some supporters of the proposed new facilities see an ‘interesting dynamic because there will be new buyers on the street.’ They think new bidders mean higher prices. Are we sure that’s true?”
He spoke to the emotions of the day and reminded readers that it is a really tough business. One commenter was particularly outraged by Henderson’s candid speech (which I addressed here):
The editor of this magazine, Greg Henderson, writes in Packing Plants Fool’s Gold: “Cattle ranchers are freaking out about the capacity of U.S. slaughterhouses” … and to put it that way seemed so condescending and arrogant … Four slaughterhouses control 85% of the industry. And they manipulate that market and the cattle ranchers went bankrupt, went out of business …
Packer margins: Fast forward to the present. A reader recently summed up the state of affairs as follows: “There is a train wreck going on in the pure beef (non-diversified) packing segment. I predict numerous bankruptcies in the ‘privately held’ beef packing segment in the next six months; even before the new plants open.”
But it goes beyond that. For example, Tyson has just (5 August) 3rd-Results for the quarter ended October 30th (fiscal year ending October 30th). The Company’s operating margin in the beef sector for the year is negative 2% (significantly below the prior year figure of negative 0.5%). At the same time, the Company’s operating result in the beef sector for the last twelve months is negative $623 million.
As a quick recap, I recently made some comments on slaughterhouse margins (“fair,” a four-letter “F”) and summed them up as follows: “Unless something drastic changes, 2024 is expected to be a bad year… and with the prospect of even tighter inventory in the future, (slaughterhouse margins) are likely to continue to decline (the leverage is with the ranchers).” (See also Price Discovery and Slaughterhouse Margins.)
Finally, John Nalivka’s slaughterhouse margin estimates for 2023 and 2024 are negative AND are expected to remain negative through 2025 (losses of $88, $84, and $93 per unit, respectively).
SPGCI and DLR: S&P Global Commodity Insights (SPGCI) recently covered the topic “Scenario Analysis of US Beef Plant Closures.” The subtitle was: “Beef processing margins are under pressure and there seems to be no relief in sight.”
SPGCI explains that the sector has just posted the “worst second quarter (seasonal peak demand) results in history.” With further problems ahead, it is becoming increasingly likely that The industry will have to adapt its capacities.“ (Emphasis mine)
Similarly, the Daily Livestock Report (DLR) said: “Unless things change, slaughterhouse margins are likely to continue to fall, with the inevitable conclusion that some of the capacity added by millions of dollars in government money must go.“ (Emphasis mine)
Writing on the wall: When it comes to packers, some people get all confused (e.g. the commenter at the top). My guess is that some of these people are probably cheering the current margin pressures challenging beef packers (a sense of “they get what they deserve”).
But if you’re one of those people, be careful what you wish for. The writing is on the wall; negative margins will inevitably lead to less capacity over time. That will likely have some long-term consequences for the business – some of which you may like even less than the packer.
Nevil Speer is an independent consultant based in Bowling Green, KY. The views and opinions expressed herein do not reflect, or are in any way associated with, a client or business relationship. You can reach him at [email protected].
