CME: By-Product Value Affecting Pig Packer Bids

US - A confounding factor in packer bids for cattle and hogs this year has been the value of by-products, write Steve Meyer and Len Steiner.
calendar icon 19 October 2015
clock icon 4 minute read

Those items include organs (or offal), blood, hides, and head products such as cheek meat and ears. The old adage in the pork industry is that we use “everything but the squeal” from a pig and we suppose that “everything but the moo” would apply to cattle as well.

Packers must capture the highest possible value from every possible piece of the animals that they process in order to make an acceptable profit.

The rendering plant is, in almost every case, the usage of last resort where packers cook products down to meat and bone meal to capture the last residual value from products that cannot, for whatever reason, be sold for higher values in other forms.

By-product values enter the livestock economy in two major ways. First, they are an important component of packer revenue that figure directly in to packer profitability.

But perhaps more important to the live-stock and meat markets upon which we focus most of our attention, by-products and their contribution to revenue play a critical role in the derivation of packer bids.

At the end of the day, packers really don’t care where their profits come from. A dollar from high-value strip loins is the same as a dollar from a steer hide or a beef liver. Revenue from high-flying pork bellies is no different from revenue from the sale of a stomach or a box of ears. And all revenue will ultimately contribute to the amount that packers will bid for livestock.

As can be seen in the graph, these by-product values have been a drag on packer margins and on livestock bids this year. Pork by-product peaked near $30 per head in July 2014. They have fallen by more than 50 percent since then and stood at just $14.56 per head last week.

It is no coincidence that the decline in pork by-product values coincides closely (and negatively!) with the rise of the dollar since the values of most of these items are heavily dependent on exports.

It is also no coincidence that, as by-product values have fallen, pork packers’ meat margins (ie. the difference between the value of the carcass cuts such as hams, bellies, loins, etc. and the cost of the animal) have increased sharply.

During 2012 and 2013, meat margins were frequently negative due primarily to excellent by-product values. 2014 was an anomaly in that PEDv and the subsequent scare over pork availability afforded pork packers the opportunity to garner excellent meat margins as well as outstanding by-product values - at least until July!

The beef packer situation is much the same even though the magnitudes of changes are different. The first thing you should notice about the beef chart is the vast difference in the Y-axis values. Where pork by-product values peaked at $30 per head, beef values peaked at nearly $230 per head.

Some of that difference is due to parts of a cow just being bigger than parts of a pig. But the big driver of the difference is the value of cattle hides which can contribute $70 to $100 per head, depending on market conditions.

As with pork by-product, many beef items are dependent on export markets. The most important of those is the hide, the vast majority of which are exported for tanning into leather. So, hide values and total beef by-product values have, like pork values, fallen as the dollar has strengthened.

USDA-FAS data, however, indicate that the major impact of tighter cattle numbers, higher cattle prices and the stronger dollar has been to reduce the amount of beef hide exports (down 19per cent from 2014 through August). The total value of exported hides has actually increased this year.

It is clear, though, that beef packers have pushed cattle bids lower relative to cutout values to make up for lost by-product values. We do not expect this situation to change much until by-product export values rise. Producers should expect larger packer bid-to-cutout spreads for the foreseeable future.

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