As consumers were heading to the grocery stores to buy their steaks and hamburgers for grilling on this Labor Day holiday, they might have thought that the prices for the beef were quite expensive and that cattle producers were making a lot of money. They would have been correct about the first part, but not the second. Retail prices have hovered near record highs for several months. In fact, in July (the most recent month for which data are available), retail beef prices averaged a record $5.357/lb. Fed cattle prices, though, only averaged $119/cwt. As a result, the spread between the retail value of beef from a carcass and the live animal was quite wide in July 2013. In fact, this live to retail price spread, illustrated in Figure 1, was record large in July at $1,253/head. Note that this estimated spread is calculated using average carcass yields of meat and also includes the value of hide and offal products that are sold, which were also record high in July. As shown, the live to retail price spread has averaged almost $100/head, or 9%, higher in the first seven months of 2013 compared to the same time period last year.
Dissecting the live to retail price spread into margins before and after beef harvesting/processing can help identify what segments of the industry are profitable (or not profitable). Figure 2 shows the price spread between the same live animal value used in Figure 1 and the wholesale boxed beef cutouts that beef processors sell. In July, this live to cutout beef price spread averaged about $169/head, about $8/head higher than in July 2012 and about $16/head higher than the 5-year average. Note, though, that this is a gross processing margin and it doesn’t mean that beef packers are making $169/head. From this gross spread, they have to cover all their fixed and variable costs of operating, including labor, equipment, etc. As a rough industry average (they vary by plant and company), these costs generally are close to $150/head. Thus, an “average” beef packer may have been making about $9/head in July, which is seasonally the month with the highest live to cutout processing margin. Note that the packer’s gross margin averaged close to $90/head during the first four months of 2013, which would generally have been unprofitable for most all packers/processors.
The difference between the wholesale value of the beef sold by packers and the retail value (used in Figure 1), again in $/head equivalent units, is shown in Figure 3. This essentially is the gross margin that the retail industry has to cover its costs to market beef to consumers. In July, this cutout to retail price spread averaged a record $1085/head. From January to July 2013, this spread averaged $1031/head, almost $85/head higher than the same seven months in 2012.