Review: Last week’s column brought a variety of responses from readers. Predictably, some of the defeatists didn’t like the message; it undermines their story of doom (“House of Pain”).
However, in balance, other respondents remain focused on the what’s really happening in the business. That is, there’s a good story to tell. And as explained in the column, through the first half of the year:
Feedyards are scoring higher prices on bigger volume (the curve has moved up-and-to-the-right). [And] IF ’11-thru-’19 price / production levels were at current levels (~11B lb), the inflation-adjusted fed price would be ~$109/cwt. This year’s [inflation adjusted] market is $147/cwt. That represents a difference of $550+/head (apples-to-apples real dollars)! (see Chart 1)
Packer Margins: Any discussion around the fed market also lends itself to some consideration of packer margins. I addressed the issue several months ago, but given last week’s coverage, it’s useful to review the broader trends.
First, some background to get us all aligned on what’s what. From a packer perspective, gross profit and gross margin are defined as follows:
· Gross profit = sales (cutout and drop) minus cost of goods sold (live cattle).
It does NOT account for costs associated with owning and operating a processing plant (i.e. operating profit) – nor does it account for interest, depreciation and taxes (i.e. net profit). Gross profit is otherwise known as the live-to-cutout spread.
To normalize it over time, it’s useful to express gross profit as a percentage of total sales (i.e. gross margin).
· Gross margin = gross profit divided by sales (or revenue).
Long-Run View: The chart below details the longer run view of gross margin. A couple of things are especially interesting with respect to the data (see Chart 2):
1. The long-run gross margin over 44 years (1980-thru-2023) is 13.3%.
2. There’s a remarkably even split about the mean:
a. 21 years above the mean averaging 17.6% (+4.4% vs. the mean);
b. 23 years below the mean averaging 9.4% (-3.9% vs. the mean).
3. Unless something drastic changes, 2024 is shaping up to be a down year – through June, packer gross margin is running at 9.7%.
4. If we go back in time, this year’s number is essentially flat with where the industry was in 1980 – and given prospects of even tighter inventories going forward will likely decline even further (cattle feeders own the leverage).
Fair Markets: As mentioned above, some entities seemingly dismiss the current state of the business. They’re always cynical of good news. Often they hold a deep-seated commoditized, antagonistic view of the industry (versus sectors working in coordination towards building better beef products and increase consumer spending).
That brings us to USDA’s recent announcement of the forthcoming “fair and competitive” rule. For whatever reason, the agency is now providing a platform to validate the commodity mindset. John Nalivka describes it best in his recent column; he correctly explains that USDA essentially, “covered the bases for anyone who might believe [emphasis mine] that the market is not working for them.”
Four-Letter F-Word: The beef industry is winning with consumers! Now more than ever. And as the data above indicates, producers are the primary beneficiaries. None of that success stems from governmental regulation - it’s ALL been driven by free enterprise.
To that end, I wrote a column several years ago entitled, “Is Fair What We Really Want?” noting that, “[USDA] wants to promote disruption of free markets and voluntary exchange with more governmental oversight – all in the name of ‘fairness’…Making government the referee never goes well – nor ever really facilitates fairness.”
Nalivka’s column aptly summarizes all of this - the principles of free enterprise, the current working environment and USDA’s timing this way: “Ranchers are now experiencing record-high prices in the face of tightening cattle supplies and strong consumer demand for beef [emphasis mine] and subsequently making record profits….USDA does not need to tamper with the Packer and Stockyards Act.”
Nevil Speer is an independent consultant based in Bowling Green, KY. The views and opinions expressed herein do not reflect, nor are associated with in any manner, any client or business relationship. He can be reached at nevil.speer@turkeytrack.biz.
