Beef Packer Margins Sag With Product Values

Beef packer margins sagged even more last week as the wholesale market for beef and beef by-products continued to decline, the Sterling Beef Profit Tracker showed.

The spreadsheet, put out by Sterling Marketing Inc., and published by AgWeb, calculated beef margins last week at a minus $99.02 a head, down from a minus $54.88 a week ago and a plus $12.21 a month earlier.  That’s a decline of $111.23 a head in just a month.

A couple of graphs from the Livestock Marketing Information Center illustrate the point very well.  A graph of the USDA’s choice boxed-beef cutout value shows the price of beef continuing to decline.  It shows little hint of following either the average mid-February price bounce or last year’s slightly delayed recovery.

It could be argued that the seasonal turn higher has begun since last week’s average price drop was less steep than the week before, but the trend still is down.




Of further concern to packers is the drop credit, a collective term used to describe the total value of the hide and offal from a beef carcass.  This value last week was calculated by the USDA at $14.69 per cwt, only $0.09 above the $14.60 of a year ago.

The drop credit last week was $3.55 per cwt, or 24.2%, above the $11.14 average of the previous five years, but of near-equal importance to packers is the direction of the price line – downward versus the average rise as seen in an LMIC graph.

The late market analyst Tom Morgan, who specialized in analyzing the drop credit, said that since hides are such a large part of the total, and since a large percentage of the hides produced annually is made into some type of clothing, the average value to the packer is influenced highly by the relative cost of other fabrics.

Many artificial fabrics are manufactured from crude oil, which has been down sharply the past few weeks, reducing the cost of producing them.  This may have trimmed the demand for leather.

In addition, the generally rising value of the US Dollar likely is cutting the drop credit, market sources said, since a large percentage of the products, including the hides, is exported.  A stronger Dollar makes US goods more expensive.

Beef prices also aren’t bringing packers a lot of joy.  The USDA’s beef cutout value Tuesday was up a bit, but weekly averages don’t show a lot of promise toward changing the downward trend.  The choice cutout was up $0.90 per cwt at $239.12, while the select cutout was up $0.16 at $233.20.

The CME Feeder Cattle Index for the seven days ended Monday rose to $211.36 per cwt from $211.32, yet the futures market chose to drop sharply Tuesday.  The spread between the Index and the nearby Mar contract is $9.76.