Tyson Closure Weighs on Cash Cattle

Tyson announced the immediate closing of its Denison, Iowa, slaughter plant Friday. This facility was pretty much a slaughter-only plant that shipped carcasses over to Dakota City, Nebraska, for processing. They suggested the small supplies from the extended contraction in the industry and the lack of feedlot cattle for this western Iowa location were the reasons.

About 20 of the 400 employees affected will remain and operate the extended by-product rendering operations. Part of this decision could also be the most recent quarterly earnings for the beef segment. The company noted beef segment sales of $4.305 billion but a net loss of $7 million. Last year in the same quarter they reported sales of $4.189 billion and profits of $101 million. No matter how you cut it, pun intended, one less buyer for cash cattle will slightly widen the beef/cattle spread (slightly lower cash cattle).

Without going through a full model of cattle kill capacity vs. current number, we would estimate the negative effect on cash cattle from $0.25 to $0.75. For those new to cattle trading, the nation essentially has a lot of big and old plants that were set up for much larger numbers. We are processing on an annual basis only about 70% of our actual capacity. Our peak annual kill of modern times was in 1976 when we processed 42.7 million head. Of the past 20 years, we processed 36.3 million in 1997. Last year’s run was 30.2. This year it will be about 29.5. Though there have been a few plant closures in the past 15 years, we still have a capacity problem. The other side of this argument is that we are in year number two of expansion: 2016 will mark the first increase in cattle slaughter in this cycle. Now would be an ideal time to get into beef packing from a big-picture basis. That would be true if we didn’t have this still-large excess capacity problem that will be looming with us for the next five years.

Futures are currently suggesting cash cattle will end the month at $149 and waffle around with another $148 in October and $149 in December. The week before last week, we saw active trade at $150 in the South. We can’t argue with the idea of a small setback into the later part of this month. Labor Day buying will be diminishing in the second half of the month. Our target still remains at $155 via the December. Buying the coming dip may be the approach to take.

Written 8/14, posted 08/17/2015

Rich Nelson

Allendale Inc. 

815-578-6161

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