Profit margins for pork and beef processors in the U.S. are being squeezed because meat prices aren’t keeping pace with increases in livestock costs, Fitch Ratings said.
The rally in cattle prices and wide swings in the value of choice beef compared with other grades contributed to the “precipitous” drop in margins since the end of last year, Fitch, based in New York and London, said today in a report. Livestock costs probably will stay high because of “low cattle supply and strong export demand,” the company said.
Producers are lowering slaughter rates because of negative margins, and plant closures are possible, Fitch said. Since 2004, average margins for beef were $1 per hundredweight and more than $5 for pork, Fitch said. Surging meat prices have boosted costs for companies including Cracker Barrel Old Country Store Inc. and Denny’s Corp., while margins probably will narrow for processors such as Tyson Foods Inc. and Smithfield Foods Inc.
“Beef and pork processing margins, excluding benefits from strong by-product and value-added products, are declining,” Fitch said. “Processor expectations about demand and pricing have placed additional upward pressure on livestock costs, causing margins to tighten.”
Before today, cattle futures rose 13 percent in the past 12 months, reaching a $1.315 a pound on Feb. 22, the highest ever for a most-active contract on the Chicago Mercantile Exchange. Hog futures have gained 5.2 percent this year.
Since the end of 2011, the spread between choice beef and the select grade “unexpectedly tripled from normal levels” to $17 per hundredweight, “causing beef processors to bid up cattle prices,” Fitch said. “A subsequent narrowing of the choice-select spread” with cattle prices “remaining elevated resulted in margin contraction,” the company said.
While lower slaughter rates may support margins later this year, processors face “potential earnings volatility,” Fitch said. Red-meat and poultry production will decline in 2012 and exports will “remain strong,” especially to Asia, Fitch said.
U.S. pork exports rose 23 percent in 2011 from a year earlier, and beef shipments surged 21 percent, government data show. As of Jan. 1, the U.S. cattle herd was the lowest since 1952.
U.S. shoppers may pay as much as 5 percent more for beef this year, compared with a 10 percent gain last year, and pork prices may rise as much as 4 percent, compared with an 8.5 percent increase in 2011, the USDA has projected. “Price fatigue” may spur some shoppers to switch to chicken as a cheaper alternative, Fitch said.