# of Packers: Following my previous column (prompted by an email regarding cash trade), I received an insightful question about new packing plants and potential impact on market structure: “…is the amount of cash trade by a static # of packers what matters, or is it the amount of cash trade, made by an increased # of packers what matters?”
The question immediately had me recalling one of Greg Henderson’s columns from several years ago: Packing Plant Fool’s Gold.
Fool’s Gold: Henderson was essentially addressing the same question: “Some supporters of proposed new plants see an ‘interesting dynamic because there will be new buyers on the street.’ They suggest new bidders means higher prices. Are we sure that’s true?”
He was addressing the emotion of the day and reminding readers that it’s a really tough business. One talking head, in particular, took offense (which I addressed here) to Henderson’s straight talk:
The editor of this magazine, Greg Henderson, he writes in Packing Plants Fool’s Gold: ‘cattle producers work themselves into a frenzy over U.S. packer capacity’…and to put it that way just seemed so condescending and arrogant…Four packers control 85% of the industry. And they manipulate that market and cattle producers went broke, went out of business….
Packer Margins: Fast forward to now. One reader recently summarized the state of affairs like this: “There’s currently a train wreck occurring in the pure beef (non- diversified) packing segment. I predict numerous bankruptcies in the “privately owned” beef packing segment in the next six months; ahead of the new plants opening.”
But it goes beyond that. For instance, Tyson just announced (Aug 5) 3rd-quarter ’24 results (FY ends 30-Oct). The company’s beef operating margin is running negative 2% for the year (well below last year’s negative 0.5% number). Meanwhile, the company’s trailing twelve month beef operating income is negative $623M.
As quick review, I recently provided some discussion around packer margins (‘Fair’ A Four Letter F Word’) and summarized it like this: “Unless something drastic changes, 2024 is shaping up to be a down year…and given prospects of even tighter inventories going forward [packer margins] will likely decline even further (cattle feeders own the leverage).” (See also Price Discovery and Packer Margins.)
Finally, along those lines, John Nalivka’s packer margin estimates are red for ’23 and ’24 AND projected to remain negative into ’25 (losses of $88, $84, and $93/head, respectively).
SPGCI and DLR: The S&P Global Commodity Insights (SPGCI) recently addressed the topic of, “Scenario Analysis of US Beef Plant Closures.” The subtitle was, “beef packing margins are under pressure and no relief appears to be in sight.”
SPGCI explains the sector just finished the, “…the worst Q2 (peak seasonal demand) results in history. With more trouble ahead, it is becoming increasingly likely that the industry will have to adjust capacity.” (emphasis mine)
Similarly, the Daily Livestock Report (DLR) just proclaimed that, “Unless something changes, packer margins are likely to compress further, with the inevitable conclusion being that some of the capacity added via millions of government dollars will need to go away.” (emphasis mine)
Writing On The Wall: When it comes to packers, some people get all tangled up (e.g. the talking head at the top). I’m guessing some of those people are likely cheering the current margin pressure challenging beef packers (some sentiment of, “they’re gettin’ what they deserve”).
But if you’re one of those persons, be careful what you wish for. The writing is on the wall; negative margins will inevitably lead to less capacity in due time. That’ll likely mean some long-run ramifications for the business – some of which you may dislike even more than the packer.
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.
