May 30, 2008

National Beef Packing Co.'s decision to scale back slaughter this week reflects market conditions including excess beef supplies that are forcing packers to sell product to retailers at discounted prices, analysts told Meatingplace.com.

The Kansas City, Mo.-based processor announced Wednesday it was, beginning this week, trimming slaughter operations to five from six days per week at its beef plants in Liberal, Kan., Dodge City, Kan., and Brawley, Calif.

The move follows similar actions taken earlier by competitors including Tyson Foods Inc. and JBS-Swift & Co. in an effort to balance supply and demand, which has helped the industry return to profitability in recent months.

But excess beef supplies have forced packers to sell product to retailers at lower prices, said David Hales, president of cattle futures trade specialist Hales Trading Company. "We still hear margins are good but beef inventories are building in the cooler," he said. "And to sell the excess beef supplies, they are going to be forced to take money off the cutout and damage margins. So to limit the impact they are cutting kills."

An increase of beef in cold storage to 429 million pounds at the end of April, from 423.2 million at the end of March and some 417 million pounds a year earlier, isn't substantial enough to qualify as a significant factor, University of Missouri Agriculture Economist Ron Plain told Meatingplace.com, though he noted it's been a month since the most recent data was published. "The main reason is beef packers have been dealing with tight margins for some time, and we've got surplus slaughter capacity," he said.

However, Hales points out that USDA's weekly comprehensive cutout report showed boxed beef sales down 80 percent from the prior week (week of May 23 versus week of May 16) while steer and heifer slaughter was up 0.4 percent. "In our opinion, this statistic supports the packer saying cooler stocks have been building," he said.

Demand?

But the surpluses may be short-lived. And as National Beef and others continue to manage slaughter rates, prices will rise. Andy Gottschalk, analyst with agribusiness market research firm HedgersEdge.com, told Meatingplace.com that lower-priced product booked in advance by retailers in April is generally depleted.

"Price points will be raised to consumers as the new and much higher-priced product fills the pipeline," he said. "Consumer demand, which has been good, has an uncertain future with the higher retail prices that will begin to show in the coming weeks."

Gottschalk added that weekly slaughter levels peaked at 722,000 head the week ended May 24. "We have seen the highest weekly slaughter levels for the year," he said.

All signs point to an increasingly rational beef packing industry, a plus for overall industry margins, BMO Capital Markets analyst Kenneth Zaslow wrote Thursday in a note to investors. The news is especially positive for Tyson, whose margins exceed the industry average.