Some Thoughts from John Nalivka: Decisions Impacting Margin Outlook

It’s no surprise (at least to some of us) that there has been a marked shift in beef industry margins over the past two years. Most notably, beef packer/processor margins have deteriorated over the past 2 years from an annual average of nearly $650 per head in 2021 to $20 per head currently. Feedlot margins have declined from those achieved in the past 12 months, while cow-calf producers could see around $150 per cow this year with further improvement to $175 per cow forecast for 2023 So what does this mean for the financial outlook going forward?

The outlook for the cattle industry largely depends on the availability of pasture, the cost of grain and other inputs, and ultimately decisions made by either party at the production end. of the supply chain. It’s the cattle cycle and while there’s a lot of debate about how it’s changed, it really hasn’t. The cycle is largely driven by forage, with drought leading to herd liquidation, followed by fewer cattle and higher prices which, in turn, trigger herd expansion – if supplies in fodder are sufficient. We are nearing the end of the year and herd liquidation this year will lower slaughter cattle numbers in 2023 by 6% and the lowest since 2014. Depending on demand – a critical factor given the he state of the economy now and in 2023 – will support an expected 15-20% increase in feeder cattle and calf prices (Sterling Marketing – Oct. 4).

So if the livestock cycle is alive and well, when will higher prices lead to herd building? There are several answers, but again the forage will be the most important factor and, secondly, the timing of the producer’s response. That’s a big deal with the growing likelihood of a snag in consumer demand next year resulting from significantly higher inflation, impacting consumer purchases, key to price analysis. At the same time, the record cost of gain could have a greater impact on feeder cattle prices, regardless of limited feeder cattle supplies. Only time will tell how it turns out.

This brings me to another issue that will play out and is also tied to cattle numbers – the new capacity of fatty beef plants. My calculated capacity utilization for feedlots has averaged around 88% this year and 89% in 2021. In 2014 beef plant utilization averaged 82%, with almost the same capacity as in 2022. Packer margins averaged $3 per head in 2014.

As I noted, increased competition for cattle and higher prices relative to a lower cut have already put pressure on packer margins – $20 a head. The question is how will margins be fair if capacity is increased in the face of declining cattle numbers over the next 2-3 years? And more importantly, who will win this battle – the old factory or the new? There are many factors to consider, including who is building the factory, where is it located, and last but not least, marketing. It’s pretty safe to say that if these three factors aren’t properly aligned, someone may not like the outcome!