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Thursday, November 10, 2016

Processor margins improve, but still underwater.

By Matt Dalgleish  |  Source: MLA, Steiner, USDA, Trade, ACA

Key points

  • Processor margins lift from the August $187 loss per head seasonal low to record an October figure of $104 loss per head, bringing the yearly average margin to a $70 per head loss.
  • Historic seasonal patterns suggest margin levels until the end of the year are likely to stabilise or continue to improve slightly
  • The 2017 season will be tough for processors as downward revisions to expected annual slaughter will impact upon yearly average margins, pushing them towards a $90 per head loss.

2016-11-10 Processors Fig 1

2016-11-10 Processors Fig 2

2016-11-10 Processors Fig 3

The Mecardo theoretical cut-out model shows that processor margins have improved from the August 2016 seasonal nadir and continues to replicate the yearly pattern set during 2005, which suggests continued improvement in margins are likely until the end of the year – but what is in store for 2017?

Throughout the season we have re-visited the processor margin cut-out model to determine the current state of play for the average processor. As indicated in previous cut-out analysis, the model is a theoretical tool that uses a variety of beef export prices to derive a total “cow value” from all of the component cuts of meat, co-products, hides, etc. which can be used to subtract cost of purchase and processing costs to calculate an approximate processor margin for an average industry player – click here to read more about the cut-out model or here for the previous cut-out analysis.

Figure 1 highlights the historic trend for processor margins according to the cut-out model, showing a recent improvement from the August low of $187 loss per head to record an October processor margin of $104 loss per head, as softer cattle market flows through into a lower purchasing costs. Unsurprisingly, the average seasonal pattern for processor margins responds accordingly to the normal seasonal supply/price trends within cattle markets. This is highlighted by the normal reduction in margins during winter as tighter supply is often accompanied by a rise in cattle prices and therefore higher input costs to processors – figure 2.

Indeed, the seasonal monthly pattern in margins for 2016 shows a remarkably similar shape set by the 2005 season. Previous analysis has identified a myriad of similarities in weekly slaughter numbers, percentage price movements and rainfall distribution between 2005 and the current season so it comes as no surprise that the processor margin pattern is also mirroring the 2005 year. As the ten -year average processor margin trend line and the 2015/2005 seasonal pattern demonstrates November and December are usually characterised by stable to slightly recovering margins, which suggests the remainder of this year will be on the improve for processors.

Despite the likelihood of an improved end to the 2016 year there is a dark cloud on the horizon for processors in the form of very tight supply and low slaughter numbers forecast for the 2017 season. The October release of the MLA cattle market outlook saw a slight downward revision to annual slaughter estimates and this is likely to flow through into tighter margins next year. Figure 3 demonstrates the relationship between the average yearly processor margin and the annual female slaughter figures since 2000. Clearly, the link between lower female slaughter and reducing processor margins is evident. 

What does this mean?

Currently, the yearly average margin for 2016 sits at a $70 per head loss and is expected to finish the season around the $60 loss area (blue square – figure 3), particularly if margins improve enough over November and December as the seasonal patterns suggest.

However, the lower slaughter forecast for 2017, provided by the MLA cattle market update, indicates an average yearly margin of around $90 loss per head can be expected for processors next year (orange triangle).

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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