Tue, 13 Feb 2018
US - Packer margins have come under pressure in recent days, which has in turn negatively impacted the outlook for livestock prices in the short term, Steiner Consulting Group, DLR Division, Inc. reports.
Some of what is going on is normal for this time of year. Lent will start on 14 February this year and will end on 29 March. While Lent does not affect demand for meat protein as much as in the past, retailers still pay attention to it and, at the margin, we think it affects the amount of featuring around the country.
Foodservice business tends to be slow during this time of year as well, further contributing to the negative demand picture. Keep in mind that we are talking about seasonal demand at this point. Overall meat protein demand remains quite good compared to previous years. Income growth, unemployment and housing markets all remain in good shape despite the recent shakeout in the equity markets.
We do not provide an estimate of the net packer margin because we think production costs tend to vary significantly from packer to packer and depend greatly on capacity utilization. The charts below illustrate gross margin calculations. The shaded area in each chart shows where we think packers need to be in order to cover costs. View it as an indication and nothing more.
Pork packers margins have deteriorated the most. The table at the bottom of the page shows the average net price for hogs last week was around $74.4/cwt and the average value of the cutout was $77.4. Keep in mind that the price of hogs in our table is preliminary. Friday hog prices are not available until Monday so the preliminary price is calculated using the five most recent business days.
The meat spread (difference between cutout and hogs) is now under $3/cwt or around $6/head. This is the lowest level since July of 2015. The line chart above shows the parallels between the current margin level and what packers/producers experienced during that year. For the entire Q1 of that year the meat margin averaged $10/head and in Q2 it was under $6/head.
High prices the previous year (PEDv in 2014) and resurgent meat supplies negatively impacted pork values this year. While we think the demand picture this year is better than it was in 2015, recent trading shows what happens when markets sometimes get ahead of themselves. Meat sales are only part of the revenue that packers generate from processing hogs.
According to LMIC data the value of hog by-products is running around $18- 19/head. This is higher than what the USDA calculates but we think it be running around $18- 19/head. This is higher than what the USDA calculates but we think it better values these sales. The overall gross packer margin currently is around $25/head, compared to $46/head at the start of the year and $46/head a year ago.
Ham values will be critical for the pork cutout in the short term. Normally ham prices are supported until later in February so the recent decline was viewed as particularly negative. The selloff in bellies will likely push more product into cold storage but larger belly stocks then tend to temper the outlook for prices in late spring and summer.
Beef packer margins have also come under some pressure but so far the levels are normal for this time of year. We think gross margin is around $200/head, near breakeven. Steer by-product is currently calculated at $10.33/cwt or 144/head, $20/head (-12 per cent) less than the same week a year ago.