April 27th, 2012

Cattle Futures – U.S. beef packer profits are back in the black for the first time in seven months as the onset of spring has boosted demand for steaks and hamburgers that will headline backyard cookouts.

This annual surge in beef sales, and subsequent profits, could not come soon enough for the U.S. beef industry, which has been hurt by drought, an uproar over ammonia-treated beef, and another case of mad cow disease.

On Thursday, U.S. beef packers earned an estimated $3.45 per head of cattle, according to the Colorado-based analytics firm HedgersEdge, which uses proprietary data to calculate the margins.

It was the first time the closely watched HedgersEdge’s beef margins were positive since Sept. 15 when profits were $2.60 per head. Since that time, the margins were largely in the red with losses eventually reaching $121.20 per head — the worst in the 22 years that HedgersEdge has records.

The margin recovery should help the bottom lines of meat packing companies like Cargill Beef, Tyson Foods Inc, JBS USA and National Beef Packing Company as the spring grilling season gains momentum heading toward the U.S. Memorial Day weekend May 26-28. That holiday weekend is often seen as the unofficial start of summer, when more and more outdoor grills are fired up.

INDUSTRY ENDURES MAD COW, PINK SLIME TESTS

The latest mad cow case was the first in six years in the United States, but, unlike the first case in 2003, domestic and overseas buyers were unfazed by the news, primarily due to assurances that meat from the animal did not enter the food supply. Domestic beef prices were higher on Thursday and foreign customers this week said they would keep buying.

The mad cow case occurred just as the industry was recovering from the uproar over the use of lean finely textured beef that critics called “pink slime”. The concern was that some processors treated that beef with ammonia.

That uproar slowed beef sales just as supermarkets were ordering for the grilling season. Those concerns have since died down as many food companies and stores said they would stop using the beef product.

The rebound in beef margins was fueled in part by beef companies reducing cattle slaughter to tighten the supply of beef and paying less for cattle. Cash cattle prices have dropped to about $120 per cwt, or about 8 percent, from a record high $130 in March.

Last week’s cattle slaughter was down 7.9 percent, compared with last year and down 5.3 percent so far this year, according to the U.S. Department of Agriculture (USDA).

“Directionally, margins are moving in an encouraging direction from where they have been,” said Cargill Beef President John Keating in an email. “Hopefully, as we get into grilling season, the situation will continue to improve.”

Cargill Beef, a unit of agribusiness conglomerate Cargill Inc, is one of the four largest U.S. beef producers.

BEEF PRICES RISE

The reduced cattle slaughter has helped to lift prices for beef at the wholesale level.

Choice-grade beef, which is preferred by cookout enthusiasts, was quoted by USDA on Thursday at $190.74 per cwt. That is up 8 percent from $176.70 two weeks ago.

“We had 10 days of gains on wholesale beef, and at the same time we’ve seen lower cash (cattle) prices,” said Rich Nelson, director of research at Allendale Inc. in McHenry, Illinois.

“This disparity between wholesale beef and cattle are the key issues right now,” he added.

Nelson said the recent rise in wholesale beef prices, or the cutout in industry parlance, signals that retailers are stocking up on beef for the grilling season.

He also attributed reduced beef production for the improvement, partly the result of food companies switching to other beef items from the ridiculed “lean finely textured beef.”

“That product itself accounted for 2 to 3 percent of total beef production,” Nelson of the finely textured beef.

- Theopolis Waters, Reuters