In the past, record-high livestock prices such as we have seen this year usually meant that packers lost money by the boatload — but not so in 2011. Packer margins in both the beef and pork sectors have been exceptionally good for much of the year and have, on occasion, neared all-time record levels.
Recent quarterly reports from Tyson, Smithfield, Seaboard and others bear this out pretty clearly. We think the biggest reasons for strong packer margins are strong domestic and international demand and a packing sector that is very close to the perfect size for current hog supplies. Demand provides pricing “space” for higher-valued products. A correctly sized sector means packers seldom have to chase pigs to keep lines running at speeds that keep unit cots near their optimum.
But there is one major difference between the beef and pork packing sectors: The beef packing business is still too large relative to fed cattle supplies — and that problem will get worse before it gets better. This excess capacity is very likely a major reason for margin volatility — which will likely continue as well.
As seen on marketwatchonline.com
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