Though unsurprising, dwindling cattle numbers, which will be exacerbated by herd expansion, likely will continue to make the sledding tougher for packers until more capacity exits the business.
According to Steve Meyer and Len Steiner in a recent issue of their Daily Livestock Report, total packing capacity of the top 30 beef slaughter firms, which account for about 98% of total capacity, has been relatively steady since 2008 amid declining cattle inventory. Based on capacity data from Steve Kay’s Cattle Buyers Weekly, Steiner and Meyer explain unused capacity was about 10% during peak use in 2012. The average for the year was about 15% idle capacity.
“That has not been good for margins and the pressure is likely to grow as the diminished calf crops of 2012 and 2013 (and 2014? and 2015?) work their way through pastures, background lots, feedlots, etc.,” Meyer and Steiner say. “The competitive forces of excess capacity eventually drive packer margins low enough that someone is forced to cut back or exit the business. That action, of course, puts capacity in balance once again, reducing the level of competition for livestock and allowing margins to grow to sustaining levels. The opposite is also true — tight capacity allows packers to realize better margins, thus providing incentives to expand, again balancing capacity with numbers. The process is far from precise, however, since animal numbers can generally be changed much more quickly than can capacity.”
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