CME: Pork, Beef Packers Keep 'Meat' Margins Positive
US - Steve Meyer writes: Just a personal urging that you make time on Monday to attend a memorial service in your city or town to honor the men and women who have paid such an awful yet dear price for our freedom and the freedom of so many others worldwide.The US
makes some mistakes but some of our best people always answer the call when the liberties of free people or people who long to be free are
on the line. And thousands have paid the ultimate price for those liberties. It always deepens my gratitude and freshens my perspective to
listen to words of tribute and hear the strains of Taps ringing from the walls of a grand building or echoing off the ancient trees of a hallowed
cemetery. I think it will do the same for you. Please try to make time to honor these fallen heroes.
One of the interesting aspects of this spring’s big rally
in hog and cattle prices is the fact that they occurred while
packer margins remained quite healthy. Neither pork nor beef
packers’ estimated gross margins have hit record levels but they have
been among the best 10 per cent of the weeks for which I keep estimates.
One question I hear from time to time is “Just where do
packers make their money?“ A definitive answer to that one depends
on where you draw the line for a “packer“. Some packers are strictly
“kill and cut“ operations that sell primal cuts or boxed items that are
typically boneless and often vacuum packed. On the pork side,
though, some packers do a great deal of value-adding in the form of
curing, smoking and cooking. Generally, further processing basic
primal cuts is a key profit area for packers. But estimating those
“value-added“ margins is quite difficult since they vary so much from
packer to packer and depend on other factors such as the presence of
brands.


As can be seen above, by-product values play a very important
role in the packer margin picture and have been a key factor for
both pork and beef packers this year. The beef by-product value is
larger than that of pork because of the much higher value of beef
hides which is itself quite dependent on the world economy and exports;
thus the big impact of the recession on beef by-product values.
Packers of both species have done a much better job of
keeping “meat“ margins positive — beef packers since late 2007 and
pork packers since mid-2009. The change for beef packers coincided
with a reduction in excess capacity from the closure of Tyson’s Emporia
plant. There were no major structural changes that flipped pork
meat margins from negative to positive last year but they have held up
well this year in the face of lower numbers. The closure of Morrell’s
Sioux City plant in March has been part of that performance.
The charts below show total gross margins and hog and
fed cattle prices and demonstrate an interesting change in correlation:
Where once (before 2003 for hogs, before mid-2007 for cattle) the two
values were negatively correlated, they are now are more POSITIVELY
correlated. Strong wholesale-level demand is good for all!!

