As wholesale beef values remain below expectations, packer incomes are being hampered by lower byproduct values.
These products consist of the hide, cheek meat, hearts, livers, tongues, bone meal, tallow and other products and often are the heart of profits for beef packers. Many of the edible items find little value in the US except as pet food and are exported to countries where they command much higher prices.
Most hides also are exported because stringent environmental laws make it more expensive to tan them at home than to sell them abroad and buy back the finished products like shoes, seat covers or clothing.
By-product values once were considered to be the profit center for packers. The meat sold for near a break-even price while the by-products flew under the radar and brought in the profit.
That’s not the case anymore, but byproducts still are important to packers’ bottom lines.
Beef and pork byproduct prices have been trending lower since March. Beef byproduct values hit their annual low last week at $10.90 per cwt on a live steer basis, according to USDA data.
A graph clearly illustrates the problem packers have had with byproduct values. Average values are $5.48 per cwt, or 33.5%, below last year’s $16.38 and $1.46, or 11.8% below the 2009-2013 average of $12.36.
The beef byproduct value is mainly affected by its largest product, the hide, and USDA said that for the week of Nov. 20, the standard butt-branded hide was $68.00 apiece, more than $30 below a year earlier.
SUPPLIES, INTERNATIONAL MARKETS DRIVE PRICES
Since byproduct values are largely export driven, international markets, along with supply, are the main factors affecting prices. And among the important factors affecting international markets, the currency exchange rate is the most important factor.
In the short run, byproduct markets can withstand currency fluctuations pretty well. However, over time, the value of the US dollar relative to other currencies is paramount.
The US dollar fell in relation to other currencies beginning in 2007 and hit its lows in late 2011. Since then, the greenback has climbed above the 2007 high in all major byproduct markets except South Korea.
The US dollar rise’s effect on US byproduct sales is exacerbated by rising supplies as the beef herd grows. Pressure from a stronger US dollar was already in the market, but it took rising inventories to give international buyers the leverage they needed to take prices lower.
Now, with the US Federal Reserve on the brink of raising interest rates to keep US economic growth from stimulating inflation, the US dollar continues its overall rise against other currencies. It seems evident, then, that byproduct values will continue to struggle.
CASH FED CATTLE MARKETS LEAK VALUE
Cash fed cattle markets Wednesday continued to leak value as a few trades were reported at $123 to $124 per cwt on a live basis. While this is up from $121 reported earlier this week on some discounted Iowa cattle, it’s down from the $124 to mostly $127 seen last week.
Small, widely scattered dressed-basis trades continue to be reported at $195 per cwt, steady with last week.
Wholesale beef prices Wednesday were mixed. The USDA choice cutout was up $0.27 per cwt on the day at $204.08, and the select cutout was off $0.44 at $192.25. The choice/select spread widened to $11.83 from $11.12 on Monday, and there were 123 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Tuesday was $172.36, down $1.69. This compares with the Jan settlement Wednesday of $160.72, down $3.67.