Packing plant closure raises questions about your 2013 profits

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America’s historic drought reached in your pocket again last week. Cattle markets reacted swiftly to the news Cargill Meat Solutions would idle its Plainview, Tex., beef slaughter facility, with cash and futures markets turning sharply lower on Friday. The effect on your profit margins, however, may linger for months. In fact, analysts believe the idling of the Plainview plant could be an indication 2013 cattle markets will underperform compared to expectations. In short, cattlemen have lost significant marketplace leverage.

Announcing the plant idling, Cargill cited the tight cattle supply associated with years of drought in Texas and the southern Plains states as factors. America’s cattle herd is the smallest since 1952, and analysts have warned that excess capacity in the feeding and packing industries was reaching a critical point.

John Nalivka, president, Sterling Marketing, Inc., Vale, Ore., says removing the Plainview plant from the daily slaughter total will increase capacity utilization in the packing industry from 83 to 86 percent, but the problem will persist.

“Underutilization of capacity will continue to plague the packing industry as supplies decline over the next two years, particularly in the uncertain demand environment faced by the industry” Nalivka says.

The Plainview plant has a slaughter capacity of 4,650 per day, but already a portion of that capacity was being used for slaughter cows and bulls. The industry retains plenty of slaughter capacity as the cattle will shift to other locations for harvest. At least in the short-term, however, the concern is how the action by Cargill will impact the leverage between cattle feeder and packers.

And if that means lower prices for fed cattle in the coming months, it will also trickle-down into lower prices for feeder cattle.

The Cargill news hit the cattle markets hard. Nearby Live Cattle futures prices were sharply lower Friday and recorded $5 losses for the week. Cash fed cattle prices traded at $124 to $125 per hundredweight, $2 to $3 lower than the previous week. Dressed sales occurred at $198 to $199 per hundredweight, a $5 to $6 per hundredweight decline.

Boxed beef prices declined sharply for the week. Choice boxed beef cut-out values Friday were $189.84 per hundredweight, down $4.40 from last Friday. Select boxed beef traded at $182.61. The Choice/Select spread was $7.24 per hundredweight.

Feeder cattle and calves sold steadily lower throughout the week. Feeder cattle and short-yearlings over 600 pounds started the week $3 to $5 per hundredweight lower, but were $4 to $8 lower by week’s end. Calves and lighter cattle were uneven at $5 higher to $5 lower, with the higher prices found early in the week.

 “The tight-supply driven joy ride that cattle markets have enjoyed recently in the face of severe feed shortages and the struggling economy encountered hurdles in its path this past week,” USDA Market News Reporter Corbitt Wall said. “Pressure began with last Friday’s USDA report that drastically lowered grain stock estimates and placed fear within the agricultural markets that rationing may become a reality (most likely through pricing).  CME cattle futures latched on to the lead balloon and immediately weighed on cash feeder markets which already entered the week with many outlets clogged from last week’s heavy movement.”

Last week’s auction receipts totaled 293,100, compared to 345,100, the previous week and 298,500 last year. Direct sales of stocker and feeder cattle totaled 33,400 with video/Internet sales at 150,700. The weekly total was 477,200, compared to 455,800 last year.

 
 
 

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