By Matt Dalgleish | Source: MLA, Steiner, USDA, Trade, Mecardo
Processor margins for the first quarter of 2018 have shown continued improvement from last season as falling domestic cattle prices have combined with robust beef export prices and broad support for co-product values to see meat works sitting comfortably back in the black, according to the Mecardo processor cut out model.
The seasonal trend for 2018 in the processor margin continues to trek above the long term average levels, with the average monthly margin for the first quarter of 2018 sitting at $52.45 per head, 28.5% above the average trend for the same time frame. This was despite a slight decline in the monthly margin from $64.80 in February* to $47.25 in March – Figure 1.
As outlined in our piece on beef export prices released a fortnight ago the US 90CL frozen cow indicator and Fullset beef export price to Japan have both started the year trending above average seasonal levels, while Korean beef export prices have shown a significant improvement over March. These robust beef export levels have allowed processors to begin the first quarter in reasonably good shape as domestic cattle prices have softened.
The processor analysis published in March identified that at that stage processors were reluctant to pay up for EYCI style cattle, according to the underlying EYCI data. However, the analysis suggested that it would be likely to see a narrowing of the processor spread discount to the EYCI in the following months, particularly if a profitable margin could be maintained. Indeed, this has been the case during April with the processor spread narrowing from a 7.4% discount at the start of March to a 4.6% discount as of last week – Figure 2.
Despite the improved narrowing price spread relationship, the underlying EYCI data highlights that processors are still somewhat reluctant to lift their volume of purchases of EYCI style cattle at the saleyard. Average weekly purchases of EYCI style cattle so far this season is sitting at 2,467 head compared to 2,578 head for the same time frame during 2017, or 4.3% softer in relative terms. This level remains 45% below the weekly average volume of around 4,500 head according to the ten-year average pattern – Figure 3.
*N.B – Input data to the Mecardo cutout model, such as beef export prices/cutout values and co-product prices, can be revised post reporting. These amendments to can sometimes see the previous monthly margin figures revised to factor in the input revisions.
Despite the dry start to the season in much of the South East, supply is still relatively tight due to the historic low herd numbers. This is a likely factor limiting the ability and the incentive for processors to increase volume capacity at this stage in the herd rebuild phase.
There is also a likelihood that the trend toward lower processor purchases at the sale yard over time are reflective of a broader move toward OTH and direct purchases. However, limited volume data exists for this supply avenue so it is difficult to quantify explicitly.
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