U.S. cattle producer Brad Kooima declined multiple, escalating bids from meatpackers seeking to buy his livestock to hold out for higher prices.
His bargaining power is a dramatic reversal from three years ago, when cattle were plentiful and Kooima said he went seven weeks without getting a bid as COVID-19 outbreaks shut meat plants, making it difficult to sell livestock.
Now, the U.S. beef cow herd is the smallest since 1962. Drought and high feed costs drove producers to send animals to slaughter instead of keeping them for breeding. Farmers who fatten cattle have gained leverage in sales negotiations over the meatpackers that dominate the market, such as Tyson Foods Inc (NYSE:TSN), Cargill Inc and JBS USA.
Paying more for cattle cuts into the meatpackers' profitability. They will likely try to pass on costs to customers, charging more for ground beef and steaks at a time of high inflation, analysts said.
Cargill, the world's largest ground beef producer, expects cattle prices will rise further, but it is still a question whether higher beef prices will ruin consumers' appetites, company executives said.
"The unknown factor there is demand: how much will the consumer pay?" said Tom Windish, who oversees Cargill's beef business.
Meat processors are assessing demand, along with cattle supplies and operating margins, to determine how much to run their slaughterhouses.
Cargill does not need to operate plants for as many hours as it did in 2020 because of tighter supplies and improving staffing levels, said Hans Kabat, leader of Cargill's North American protein unit.
The amount of money meatpackers earn buying cattle and converting them into meat fell below $40 per head of cattle in April, after topping $700 per head in May 2020, analysts at HedgersEdge.com said. On Wednesday, the margins were about $117 per head.
Kooima said he declined packers' attempts last month to buy high-quality cattle in Iowa's cash market for $182 per hundredweight and $183 before ultimately scoring a bid for his target price: $185.
Strong consumer demand for beef so far is helping boost competition for cattle. Demand generally increases as the weather warms up and grilling season begins.
"Three years ago, the first bid we got, we took it," said Todd Drake, another producer who feeds several thousand cattle. "Today, they bid me $178 on a Tuesday, and it's like, 'Yeah we're going to wait.'"
Live cattle futures prices reached a record 177.700 cents per pound for the front-month contract on April 13, before easing in May. The peak was up 26% from a year earlier and 118% from April 2020.
'PACKERS ARE SCRAMBLING'
The average retail price for choice beef in the first quarter was about $7.60 a pound, 0.6% lower than a year earlier but up 18% from 2021, Agriculture Department data show.
In Tyson's beef business, its biggest unit by sales, adjusted operating margins dwindled to 2.7% in the quarter that ended on Dec. 31 from 19.1% the previous year. The company said costs to buy live cattle soared about $530 million.
Goldman Sachs (NYSE:GS) estimates Tyson's beef margins were 3% in the next quarter, down from 12.7% a year earlier, and will average less than 2% in 2024 and 2025. Tyson declined to comment before it reports earnings on Monday.
Source: investing.com
Photo Credit: USDA
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