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
This material has been prepared by a sales or trading employee or agent of Allendale Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Allendale Inc.’s Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW. PERSONS IN POSSESSION OF THIS COMMUNICATION INDIRECTLY SHOULD INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITION OR RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS COMMUNICATION INDIRECTLY AND SOLICITATIONS ARE PROHIBITED IN YOUR JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY IN THIS COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Allendale Inc. believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.