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CME: Fluctuations in Pork Packer Margins

by 5m Editor
10 June 2009, at 10:58am

US - The past few months have caused wild fluctuations for pork and beef packers just as they have for producers, reports CME's Daily Livestock Report for 9 June 2009.

Packer margins have been very variable as packers try to handle the impacts of the world economic slowdown on both domestic and export demand. The graphs below show the meat and by-product (better named “coproduct“, we think) margins for both beef and pork packers. These are gross margins from which packers still must pay labor, utilities, transportation, packaging and overhead before arriving at a net margin. The beef meat margin represents the weighted cutout value for both Choice and Select less the weighted average cost of all steers and heifers, both live purchases and carcass purchases. The co-product value comes from USDA. The pork meat margin is simply the cutout value less the weighted average net price across all purchase types (ie. the average cost of hogs to packers). The co-product value comes from the Livestock Marketing Information Center.

As can be seen, beef packers are trying mightily to compensate for a significant loss in co-product value, attributable primarily to lower hide values due to lower export demand for hides and an economic slowdown that has no doubt reduced the demand for leather. We noted last week that car companies’ have reduced their use of leather as sales have slowed. As we discussed two weeks ago, beef cutout values have been nothing to shout about (unless one is crying “NOOOOOO!“) since the H1N1 influenza situation began but packers have pushed down fed cattle prices $5 to $7/cwt live weight and roughly $10/cwt carcass weight to get meat margins back in the black. Beef packers’ total gross margin for the week that ended May 23, the last week for which grading percentage data are presently available, was $158.26/head, very close to last year’s $170.21/head and the 2003-2007 average of $164.24/head. These levels follow excellent margins in January ($200-$250/head) but very low margins of only $75- $90/head in late March and early April. Obviously, the co-product value has been the big factor. Through March, beef variety meats exports (which do NOT include hides) were down 6.9 per cent in volume and 19.2 per cent in value versus 2008 with much of that loss being in sales to Mexico, our largest beef variety meat customer.

Pork packer margins have fluctuated, too, but those fluctuations have been in the range of bad to abysmal. Gross packer margins have been between $5 and $15/head for all but 4 weeks this year where the average for January through May from 2003 through 2007 was $18.64/head. Of the 4 weeks outside that range, two were above $15 and two were actually below $5/head — the lowest since June 1996. As can be seen in the pork chart, coproduct values were a big problem in the second half of 2008 as exports slowed sharply. But co-product values have recovered from less than $13/head at year’s end to over $18/head last week. While some export products, most notably stomachs which have gone from $0.70 to $0.88 per pound this year, have contributed, the real drivers of the increase are protein products (meat and bone meal and blood meal) and fat. Protein products have risen along with soybean meal since porcine origin product can be used in cattle diets where bovine origin product cannot. Fat prices have risen with corn prices since fat is an excellent source of dietary energy. The challenge, obviously, is horrible meat margins. The usual driver of negative meat margins is excess slaughter capacity and there is no doubt some extra chain and cooler space available right now. But these margins so persistently bad that they make us wonder about the accuracy of the cutout value data. Part of the problem may be that pork wholesale cuts are reported voluntarily and are VERY thinly traded (ie. there is a lot of formula pricing) and then VERY thinly reported but that has been true for a long time and we haven’t seen this kind of negative meat margin situation since 1996-97, the last time we had a significant amount of excess slaughter capacity in the pork industry.