Tight cattle market surges on Tyson news

Tight cattle market surges on Tyson news

- Tyson processes 25% of daily U.S. steer and heifer slaughter. - Carcass weights up to 20 lb. heavier than last year. - Dressing perc

HOLD on tight, because it's about to get interesting in the cattle markets.

With news breaking last week that Tyson Fresh Meats would suspend purchases of cattle finished on Merck's zilpaterol beta-agonist (Zilmax), cattle futures closed sharply higher last Wednesday and Thursday and left open several questions about the possible ramifications in the market moving forward.

Consider, for a moment, the role beta-agonists play in the cattle market. At an industry meeting in Denver, Colo., last week, Cactus Feeders chief executive officer Mike Engler estimated that without these metabolism-enhancing feed additives, the U.S. beef industry would either need 6% more cattle or would simply produce 6% fewer pounds of beef.

Engler, who leads a major feeding operation that has used zilpaterol on as many as 85% of its fed cattle, made the point that, without the additive, an already tight beef supply would almost necessarily get tighter. On top of that, consider the likelihood of additional export opportunities the products' absence would create.

At this point, however, the issue is a product-specific ban from a single packer rather than a broader ban of the product category as a whole. Cargill said last week it was not making any changes in its purchasing plans, and JBS USA — as of last Thursday evening — had not responded to inquiries about its plans.

However, Tyson, in and of itself, is significant in the marketplace. According to the 2013 Feedstuffs Reference Issue & Buyers' Guide, the company slaughters nearly 29,000 head of cattle per day. Economist Steve Meyer said the firm processes roughly 25% of the daily U.S. steer and heifer slaughter.

So, perhaps a quarter of the fed cattle population falls under Tyson's purview. Of course, not all of those cattle are finished using zilpaterol.

A spokesman for Merck said while proprietary information on cattle numbers was not available, the industry estimates that roughly 70% of fed cattle are finished on one of the two beta-agonists approved in the U.S.

Taking that into account, then, we're down to no more than 17.5% of the fed cattle supply being affected by the ban. Going a step further even, Merck hasn't cornered the market on beta-agonists, so at least some of those cattle are finished on Elanco's ractopamine (Optaflexx), a product that has not been mentioned in any packer bans thus far.

If the beta-agonist market is split evenly between the two manufacturers, then no more than 9% of the fed cattle population will be going off zilpaterol on Sept. 6. It is conceivable that some feeders, hoping to retain some of the benefits of beta-agonist use, will switch to ractopamine instead, perhaps reducing the overall supply impact of Tyson's decision even further.


Rising carcass weights

Tight cattle market surges on Tyson news
There are two key indicators to watch in determining the full impact of Tyson's move. The first is whether the company suddenly starts moving beef to overseas destinations that have thus far been closed to U.S. beef produced using zilpaterol.

The other metric to track over the next several months will be carcass weights. Carcass weights have been increasing steadily over the past 30 years (Figure 1), but products such as zilpaterol have played a role over the past six to seven years.

"The gains in carcass weights certainly have economic implications for both packers and feedlots," Meyer explained. "On the one hand, the use of beta-agonists tends to produce more muscle, which has a higher value in the marketplace. Also, feedlots report better conversion rates for cattle fed with beta-agonists, which lowers feeding costs."

With feed costs coming down, Meyer concluded, the ban may not be as economically negative for feedlots as it would have been even six months ago. For packers, on the other hand, heavier carcasses imply better operational efficiencies, "but at the same time, they also make it more difficult to market some muscle cuts," he cautioned.

Meyer said beef end users continue to struggle with increasing muscle sizes, and packers have had to discount some items in order to market them.

This sentiment was echoed by Texas A&M University professor Russell Cross, chair of the department of animal science, who told Feedstuffs that he fears that the industry is producing a more highly variable product today than consumers have come to expect.

"If you're paying $9.50/lb. for a steak that was in the meat case next to a $2 pork loin, that steak had better be good," Cross said, referencing the significant difference in current retail prices between two center-of-the-plate protein options.


Market fundamentals

Tight cattle market surges on Tyson news
The issues of carcass weights and dressing percentage pose another question: What has zilpaterol meant in the cattle market in terms of pricing?

In a newsletter earlier this year, CattleFax noted that carcass weights had been running nearly 20 lb. higher than a year ago.

"A 20 lb. increase implies that 4% less cattle are needed to keep beef production steady with year-ago levels," the firm explained. "Weights have been rising for a variety of reasons. First, the fed cattle market remains relatively uncurrent, and feedyards are carrying cattle longer than normal. Second, new growth technologies and genetics have increased yields."

The fed cattle dressing percentage has risen somewhat dramatically over the past two years (Figure 2). CattleFax concluded that higher yields have allowed feedyards and packers to pay more for cattle than in the past.

The firm calculated that fed cattle dressing percentages increased nearly 1% since 2009, and the 1% increase has improved the value of a fed steer almost $2/cwt., or nearly $30 per head.

"The 1% increase has likely improved feeder steer value by roughly the same amount," the newsletter summarized. "This trend is unlikely to change in the near future as overcapacity in the feedyard sector forces more efficiency in cattle to offset market losses."

Returning to the question of exports, given the sharp reaction in cattle futures to the Tyson news, traders and analysts aren't buying Tyson's explanation that the decision was based solely on animal welfare.

In a note to clients, analyst Dennis Smith at Archer Financial Services summed up a prevailing sentiment among market analysts by saying exports were the unspoken undercurrent to the story.

"The sharply higher trade tells me there's more to the story than what we're being told by Tyson Foods," Smith wrote. "The odds favor that Tyson has successfully negotiated a beef export agreement with China and possibly with Russia. Tyson is actively moving their chicken business into China, so why not beef as well?"

The Tyson news may have signaled that the beef market is bottoming out, at least in the short run. Smith advised that if the industry moves away from feed additives and average dressed weights decline as a result, there is "no doubt that exports will increase, and live cattle futures, over the long term, are capable of moving sharply higher than current levels." 

Volume:85 Issue:32

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