Beef packers margins improve on falling live cattle prices

Beef processing margins are in positive territory after significant losses during most of the summer. Beef packers" ability to maintain profitable margins while operating below full capacity is not the result of a surge in domestic beef demand; more likely, it is due to the combination of declining live cattle prices and steep reductions in animals being processed on a weekly basis, which has underpinned wholesale beef prices. However, if beef packers" selective reductions in kills are creating a backlog of fed cattle supplies, when these animals are marketed (presumably in the fourth quarter of 2015), further downward price risk could occur in the live cattle markets.

Nonetheless, it appears that packers have more leverage as the spread between fed cattle prices and wholesale beef prices continues to widen. Beef demand is expected to show the normal seasonal break from current levels heading into the fourth quarter as the focus shifts from grilling items to traditional holiday items such as turkeys and hams, easing wholesale beef prices. The price of 50-percent lean beef trimmings has plummeted despite lower overall cattle slaughter levels. The average weekly price for 50-percent lean beef trimmings for the week ending September 11th was quoted around $60/cwt, down about 5 Livestock, Dairy, and Poultry Outlook/LDP-M-255/Sept. 17, 2015 Economic Research Service, USDA $93/cwt relative to the same week last year.

This decline is not totally unexpected since cattle are record-large, and they are carrying more fat as a result of extended time on pasture and in feedlots. Ninety-percent lean processing beef prices have also eased in recent weeks (below $280/cwt), although the magnitude of declines are less than those in the 50-percent lean beef markets. The price of lean processing meat (90CL) is not likely to collapse thanks to the overall small number of cows being slaughtered and the very strong demand for lean processing meat, which continues to support higher imports.


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