By Matt Dalgleish | Source: USDA, MLA, Steiner, Trade, Mecardo.
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Ongoing dry conditions have seen monthly processor margins surge in 2019 to record highs as softening cattle input prices, and firm beef export prices combine to provide meat works with a March windfall.
Cow input prices softened 20% since the start of 2019, while beef export values lifted 5%. The net result proved a boost for processor margins, according to the Mecardo theoretical cut-out model, to see the monthly margin lift to a record profit of $420 per head of cow processed during March. This level exceeds the earlier record of $383 set in November 2014, during the midst of the previous drought – Figure 1.
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Analysis of the 2019 seasonal trend demonstrates that the processor margin calculation for January and February ($174 and $212 profit per head, respectively) weren’t too far off the seasonal low experienced during April of 2014 of $192 – Figure 2.
Furthermore, it highlights that during dry times it is not uncommon to see the processor margin exceed the upper end of the normal range that could be expected during the season, as identified by the grey shaded 70% range in Figure 2.
The improving profitability of cow slaughter for processors during March helped encourage processors to pay up for cattle. Indeed, analysis of the spread behaviour for EYCI style cattle purchased by processors at the sale yard shows that as the EYCI slid toward 385¢ during the middle of March, processors were happy to pay a premium spread of around 1.2% to secure cattle – Figure 3.
N.B The Mecardo processor margin cut out model is designed to reflect the general trend in meat works profitability during the cow slaughtering process and should be viewed as a reflection of an average industry participant. Input data used in the model can be revised post reporting each month as updated data becomes available. These amendments to can sometimes see the previous monthly margin figures revised to factor in the input revisions. Read more about the model here.
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Key points
* The Mecardo cut-out model shows processor margins hitting record highs in March, beyond $400 per head of cow processed
* Processor margins have benefited from falling cattle input prices, down 20%, and a 5% lift to beef export price levels during the first quarter of 2019
* Improved processor profitability have seen them paying a premium to secure cattle at the sale yard as prices weakened during the middle of March
What does this mean?
The last time processor spreads narrowed from a discount to a premium spread was during the May and August period in 2018, when the Mecardo model was showing the processor margins peaking – Figure 2.
In recent weeks the EYCI has rebounded, testing above 470¢ mid-week. While it is unlikely to see processors continue to pay a premium spread as the EYCI rallies, they are sure to be supporting the market on any dips, while they are making some good coin.
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