Packer Margins Continue To Be Tight

This week, big packers announced cutbacks in their hours to deal with the shortage in numbers and the negative margins they've experienced. This year will undoubtedly go down as one of the most brutal for the packing industry.

These packer announcements really don't mean much at all, except supplies are tight and they're trying to raise wholesale prices to minimize losses. But they do provide some reminders worthy of reflection.

First of all, the "stick" of leverage in the marketplace has been firmly on the side of the cow-calf producer. Numbers surely will increase, and the increased numbers will change possession of the stick. When this happens, expect discounts to grow, whether it be for unconditioned calves or Yield Grade 4s.

Secondly, our success from an industry perspective is reliant on building beef demand. Certainly exports and global competitiveness is a big part of this, but domestic demand is crucial. In recent months, poultry and pork have continued to exploit their price advantage relative to beef. If we're to move beef demand ahead, we must improve our value proposition relative to chicken and pork.

In the short term, the market responds by cutting back hours, or by cutting prices, etc. In the long term, we have to build demand.

Businessman and entrepreneur Harvey MacKay wrote a book entitled "Dig Your Well Before You're Thirsty." It's a suitable analogy for a beef industry that's just experienced a period of rapid demand growth and record prices, and has begun to see those trends soften.