By Matt Dalgleish | Source: MLA, Mecardo.
The Mecardo cut-out model shows processor margins narrowing 70% over September, as rising input prices put the squeeze on meat works. Although, it’s not all doom and gloom as margins remain in the black and are trending above the long-term September seasonal average.
Input data to the Mecardo cutout model, such as beef export prices/cutout values and co-product prices, can be revised post reporting each month. These amendments can sometimes see the previous monthly margin figures revised to factor in the input revision and this was the case for margin figures reported for August.
Analysis released in early September showed the margin for August sitting at a healthy $180.65 profit per head. However, revisions to model inputs have seen the August margin narrow slightly to $165.40. Still a healthy earner for meat works and remaining above the normal range for August (Figure 1).
Increasing cattle prices during September have weighed further on processor margins with a slide back into the normal range, as identified by the grey shaded 70% region on Figure 1. Processor margins for September have averaged $46 profit per head during the month.
While this is the third lowest monthly margin recorded this season, it remains $37 above the ten-year average for September so it isn’t yet time to send your condolences to the meat works. In addition, the annual average processor margin sits at $117 profit per head for the 2018 season, thus far.
This level represents the highest annual average margin achieved by processors in four years and is likely a leading factor as to why processors remain active buyers at the saleyard, despite the narrowing margins throughout September.
Indeed, analysis of processor purchase volumes of EYCI eligible cattle at the saleyard increased over 20% during September with average weekly purchases lifting from 9,000 to 11,000 head. Interestingly, feedlot purchases of EYCI eligible cattle lifted 50% over the same time frame to over 25,000 head, while restocker purchases remain near seasonal lows at 15,000 head (Figure 2).
Key points
* The processor margin for September dropped 70% but remains in the black at $46 profit per head.
* The annual average margin remains a healthy $117 profit per head of beast processed for the 2018 season.
* Average weekly processor sale yard purchases of EYCI eligible cattle remains near seasonal highs, despite the narrowing margins, suggesting processor optimism remains firm.
What does this mean?
The healthy processor margins being achieved on an annual basis provide a good reason for increasing processor activity at the sale yard. Similarly, the lack of decent pasture across much of the East coast gives a fair account as to why restockers are reluctant to engage.
The current enigma is why feed lot activity has been on the increase in recent weeks, given our August analysis of feed lot margins showed that feeder margins had moved into negative territory. Keep an eye out for our feedlot margin update later in the week to see if circumstances have improved for feed lots.
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