A third year of drought in Texas, the biggest U.S. cattle producer, is leaving the national herd at a six-decade low and Tyson Foods Inc. (TSN) and Cargill Inc. fighting to boost margins amid excess slaughterhouse capacity.
Almost half the pastures in Texas are in poor or very poor shape because of hot, dry weather, according to the Department of Agriculture. With more than three years of rising feed costs, farmers have had less incentive to maintain herd size. The slaughter of commercial cows during the first half may be the largest for that period since 1996, the USDA said June 18.
“In the near term, the situation is still grim,” Nathan Kauffman, an agricultural economist for the Omaha branch of the Federal Reserve Bank of Kansas City, said in an interview on July 2. “There is a lack of grazing pasture land.”
The plight of cattle farmers in the Southwest is in stark contrast to the Midwest grain belt, where heavy rains are helping corn and hog output rebound from a drought last year that was the worst since the 1930s. Cargill closed a Texas beef-processing plant five months ago and there’s a risk another U.S. facility may shut somewhere in the U.S., according to industry researcher CattleFax.
“Industry relief will come when the drought breaks, input costs moderate from their current levels and herd expansion takes place,” said Mike Martin, a Cargill spokesman.
The USDA’s projections indicate the U.S. beef cattle herd won’t begin increasing until 2015 or 2016, he said.
Shares of Tyson, the largest U.S. beef processor, have climbed 37 percent this year as earnings rose at its chicken and pork units while corn prices declined. Still, the Springdale, Arkansas-based company’s profit for the quarter through March missed analysts’ estimates because its beef unit, its largest, lost money on lower cattle supplies and higher costs.
Tyson said in May its beef margins will be below the normal level of 2.5 percent to 4.5 percent in the year through September. The company, which declined to comment on its margins or the drought, will report its next earnings on Aug. 5.
Cattle are raised on ranges or pastures for 12 to 18 months before they head to feedlots where they mostly eat corn. While a big corn crop and lower feed costs will help, rebuilding the herd will depend on grazing conditions, Tim Petry, a livestock market economist for the North Dakota State University in Fargo.
The total head of cattle slaughtered in the U.S. fell 3.4 percent to 32.4 million last year as the number of federally inspected processing plants in the U.S. fell to 627 from 633, according to the USDA.
Most-active cattle futures fell 0.5 percent to $1.2215 a pound in Chicago at 1:42 p.m. They dropped 9.6 percent to $1.22725 a pound in Chicago yesterday from a record $1.3575 on Jan. 11 as some consumers shifted from higher-priced beef cuts to cheaper chicken products.
In February, Cargill closed its Plainview beef plant in Texas, which employed 2,000 people. While it has no plans to idle another North American beef plant, overcapacity is a concern, Martin said in an e-mail.
Overcapacity may expand to 15 percent in a year from about 10 percent now if the number of cattle from feedlots or cows sent to slaughter falls, said Kevin Good, an analyst at CattleFax.
Cargill is closely held and discloses limited financial date. The Minneapolis-based company said its animal-protein unit was “negatively affected” in North America, partly because of tight cattle supplies, in the quarter ended Feb. 28.
While ranchers would like to rebuild the herd, liquidation may continue without more rain, said Bill Hyman, the executive director of the Independent Cattlemen’s Association of Texas, which represents about 8,000 ranchers.
The beef industry has already been under pressure in recent years, with the price of corn climbing to a record in 2012. A recovery is unlikely in the near term and the industry continues with a “painful” process of contraction and restructuring that began with the grain rally about six years ago, Rabobank said in a report last month.
Not all analysts are so gloomy. Tyson’s fiscal 2013 earnings may exceed expectations because closing Plainview seems to have balanced supply and demand and beef-processing margins have improved in recent months, Akshay Jagdale, a New York-based analyst for KeyBanc Capital Markets, said in a June 17 report. His full-year profit projection of $2.29 a share compares with the $2.11 average of his and 11 other estimates compiled by Bloomberg.
The average capacity utilization of Tyson’s 12 beef plants fell to 76 percent in fiscal 2012 from 84 percent two years earlier, according to the company filings. In the same comparison, capacity utilization in its nine pork plants increased to 90 percent from 88 percent.
Tyson’s beef unit will post an operating margin of 0.6 percent in fiscal 2013 and 1.6 percent the following year, said Tim Ramey, a D.A. Davidson & Co. analyst in Lake Oswego, Oregon, who has a buy rating on the stock. Tyson has been taking the “right steps” to boost beef margins by giving up market share or volume at times when cattle costs erase margins, he said.
“That’s always a hard thing to do,” he said. “You need a lot of other growth to make up for decline in beef.”
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