What gross profit are packers REALLY making?

[TerraceRidge]

I've been seeing a lot of discussion recently about packer gross profit. Believe me, I have no great love for the packers, and I would much rather the American farmer/rancher make money than the packers. But if we're going to claim that they are taking advantage of cattle producers, we have to be right.

Here is an example of a Facebook post that I saw last night and that expresses a common sentiment (copied word for word):
"ATTENTION MEAT CONSUMERS....... As the packers continue to raise box beef prices to ridiculous prices spreads I would like to point out a few details. Right now with their box beef prices they are selling, it makess average fat cattle worth $235.71 per hundred weight in the meat. Translate that to what cash fat cattle should be worth is approximately 63.5% of the hanging weight. $235.72×63.5%= $149.67 per hundred weight is what cash fat cattle should be worth at that high of box beef prices. The average fat cattle prices this week have been $1.05 to $1.10. The packers are also getting a drop credit value at $107.72 of those cattle. If you take $149.76 what they should be worth -$110.00(at best)= $39.76 per hundred price difference. So if their butchering cattle weighing a average of 1,400lbs you take 14×$39.76=$556.64 profit to the packers. Wait you forgot to ad their bonus onto that! $107.72+$556.64= $664.36 PROFIT TO THE PACKERS!!!!!!! the farmers are LOSING $350 per head and the packers are PROFITING $664.36 per head. They are doing this with a smile everytime you go buy meat and sell cattle. Think about that for a minute."

But that math looks completely wrong. Assume fat cattle are $110/cwt, and assume a 63.5% dressing percentage. That makes cattle worth $173/cwt based on hanging weight. Then assume a beef cutout yield of 70%. That makes the boxed beef worth $247/cwt.

Now consider a 1400 lb finished steer with a hanging weight of 889 lb. Assume he has a yield grade of 3-4. He should yield about 70% of his hanging weight in retail cuts according to Oklahoma State University (http://4h.okstate.edu/literature-links/lit-online/animal-science-companion-animals/copy_of_beef/N-614_web.pdf/). Therefore, if our steer produces 622.3 lb of retail cuts and sells them at the price quoted in that Facebook post ($235.71), then the steer is worth $1466.82, or $104.8/cwt. The packer just lost $72.80 on that animal before the drop credit is factored in. According to the Facebook post, if the drop credit is $107.72, the packer gross profit per animal is $34.92. I frankly don't know how they're able to stay open at that price.

For the sake of discussion, here is a market report that we can use just so we're all on the same page: https://www.ams.usda.gov/mnreports/lm_xb402.txt

Here is a market report for drop credits, and it seems to be fairly in line with what was quoted in the Facebook post. The price is estimated at $7.57/cwt live weight: https://www.ams.usda.gov/mnreports/nw_ls444.txt

That is interesting, because the drop credit in 2013 was twice as much: https://www.roundupweb.com/story/2013/03/06/opinion/drop-credit-what-is-it/2230.html

This source summarizes what I'm saying:
https://beef-cattle.extension.org/what-does-the-phrase-drop-credit-refer-to/

Based on these numbers, the packing plants don't seem to be taking advantage of cattle producers at all. Can anybody challenge these numbers? I would like to be able to blame the packers for low prices as much as the next guy, but we have to use honest math.

 

[callmefence]

No lost love for them here either. This is a very good topic maybe it can be kept real. Calculate ing all the numbers is way above my pay grade.
But as a small business owner , I realize what you pay for something and what you sell it for doesn't = profit. Lots more complicated than that.

 

[HDRider]

August 8, 2019
.......................................2019*... 2018..... 2017..... 2016
Cow-Calf Margin ($ / cow) ..$138.50 $162.43 ..164.06. $176.54
Feedlot Margin($ / head) .....$54.00 . $24.04 $181.33... ($4.25)
Packer Margin($ / head) .....$174.00 $169.48 ..$97.08 $113.85

https://cdn.farmjournal.com/s3fs-public/inline-files/Beef%20Tracker%2081919.pdf

https://www.drovers.com/article/profit-tracker-packer-margins-went-how-much

Are you making $138 per calf gross profit?

 

[callmefence]

August 8, 2019
.......................................2019*... 2018..... 2017..... 2016
Cow-Calf Margin ($ / cow) ..$138.50 $162.43 ..164.06. $176.54
Feedlot Margin($ / head) .....$54.00 . $24.04 $181.33... ($4.25)
Packer Margin($ / head) .....$174.00 $169.48 ..$97.08 $113.85

https://cdn.farmjournal.com/s3fs-public/inline-files/Beef%20Tracker%2081919.pdf

https://www.drovers.com/article/profit-tracker-packer-margins-went-how-much

Are you making $138 per calf gross profit?

Idk...but maybe... Someone will criticize the fact that I inherited a large amount of my land... well all except 50 acres. I run minimal input cow/ calf. I have considerable lease property s that averages 10 per acre per year. I run understocked in most opinions. I seed winter pasture. Very rarely do I feed cattle on a daily basis. I don't feed mineral. I don't believe cattle with a variety of grazing and browse require it.
Almost all of my equipment crosses over to my other business. Including trucks and trailers, tilliage and planting equipment.
Since we are now doing considerable hay production plus hunting lease. I think when we go to profit per acre we are doing a pretty good job. Agriculture is alot like construction in that if you can't adapt very quickly you won't make it. Unless you are very large bto. The small to medium producer needs to be willing to consider his cows as only part of his business and be capable of doing their job without him a good percent of the time. I know that stinks. But it's the only way I can make it work.

 

[TerraceRidge]

Thanks for posting those links. That market report is helpful, and I think it would be good to discuss it.

I am not really in the cow-calf business anymore. Instead, I raise-pasture fed and finished beef and sell to local customers (most steers are supplemented but some are grass fed). It would be tough to make $138.50/calf on a cow/calf operation if you had to spend very much on inputs, but I can see it easily happening in a well-managed low-input forage-based system with year-round grazing (or nearly year-round grazing).

Note that the cow-calf margin you posted was calculated after annual variable costs had been subtracted out. However, the packer margin looks to be a gross margin without any of their expenses included.

I ran the numbers in an Excel spreadsheet based on the link you provided. I don't think I can attach the spreadsheet to a post, but I took a picture of my calculations so that you all can review them.


Here is what stands out to me: In order to do the calculation, I assumed that the packers are making money from only two sources. First, they're making money from beef cutout, and second, they're making money from the drop credit. But here's the problem: when I ran the numbers, the only way for their reported margin to be accurate is if they're getting an 86.4% yield (beef cutout as a percentage of hanging weight). I have never heard of a steer yielding that well before, and I don't think that it is possible unless their definition of "beef cutout" is vastly different from mine. This makes it look like either (1) what the packers are calling "beef cutout" or "boxed beef" is a much broader definition than I originally thought or (2) the packers have at least one more source of income beyond boxed beef and the drop credit.

Think about any time you've had a steer butchered. Has anybody had one produce more than 75% of the hanging weight in retail cuts of beef? If so, that must have been an extremely lean, well-muscled animal that was probably yield grade 2 or better (according to that OSU source I posted earlier).

What do you all think about this?

 

[callmefence]

I wonder what Cargills annual payroll? And don't forget they pay 12.4percent of that amount into the ss/mc . Half comes from the employee paycheck deduct, but the other half is paid by the employer. I pay it on four employees. Cargill has 160000 , not all in us .
How much do you contribute to the ss/mc program.

 

[Bigfoot]

The cost of livin is going up and the chance of livin is going down

 

[TerraceRidge]

I agree that Cargill and the other packers employ a lot of people and pay into the system, and that's all good. I'm just trying to figure out what's really going on. Some of the Facebook comments that I've read are just incredibly nasty - basically calling the packers liars, cheats, thieves, and words that I can't post here. That may or may not be true, but if we can't figure out how to read these reports, we will be in trouble. Cargill, Tyson, etc. are all run by businessmen who know what they're doing and make their living squeezing every last dime out of an operation. If we have any hope of competing, we have to understand what makes them tick.

Does anybody know what's up with my calculation that inflated the cutout numbers? I know it can't really be 86%. HDRider, do you know how the margin is calculated for the packers in that report you shared?

 

[HDRider]

I don't

 

[Nesikep]

So according to this, the hide, trim, fat bones, etc are all worthless?
Yeah right.

 

[TerraceRidge]

No, they're definitely not worthless. It's my understanding that the hide and offal is what's included in the drop credit. That averages out to $7.51/cwt based on live weight, according to this report: https://www.ams.usda.gov/mnreports/nw_ls444.txt

However, the fat and bones pose a great question. We know they're definitely not worthless, and they seem to be included in the boxed beef cutout value. Based on that, I think I may have run across how my calculations might be wrong. I've been looking at this document: https://www.ams.usda.gov/sites/default/files/media/USDADailyBoxedBeefReport.pdf

After looking over that, it seems like the boxed beef cutout value includes the value of the fat and bone. If that is true, I did not realize that. I thought that the term "boxed beef" referred to actual beef "in the box" that was sold on the wholesale market. Based on that document, though, it looks like the boxed beef cutout value (which is $253.75/cwt based on this report: https://www.ams.usda.gov/mnreports/lm_xb403.txt) must be multiplied by the entire hanging weight in order to calculate the total value of the carcass. Is this true? I was originally under the impression that the boxed beef cutout value was only multiplied by the amount of total "yield" beef in order to calculate the total value from a carcass.

Here's the most recent Sterling Beef Profit Tracker I could find: https://cdn.farmjournal.com/s3fs-public/inline-files/Beef%20tracker%20318.pdf. This must have been before the boxed beef cutout value spiked, because it was only $206.16/cwt that week. I did some calculations based on these numbers, and this is what I came up with:



I'm still not quite sure what the numbers mean yet. The one thing that I noticed is that, apparently, the Sterling Beef Profit Tracker automatically indexes the weight of all slaughter cattle to 1360 lb, which throws off the dressing percentage. It's pretty confusing, but I don't like to just blindly accept the profits that the powers that be tell us are being made without at least trying to understand it. I do think that, as producers, we should make an effort to try to understand how the feedlot/packer side works since that is who is signing many of our checks (even if there are lots of middlemen out there).

 

[farmerjan]

Corbitt Wall had a friend that is in the "beef" business, do some quick calculations on paper to show how much the packers are making on each head of beef. Back about 3-16 or 3-18 on his feeder flash. The guy who did the figuring does this for a living, think he is involved with the negotiated cash price. He seems to think that the packers are making in the neighborhood of over 400/head with all costs covered... I will have to see if I can find the feeder flash he talked about it on.

 

[farmerjan]

It was on 3-18-20 feeder flash. I am certainly not very well educated in all this but it seems that he should know what they are making . I don't know, it just seems that they are making an awful lot of money as the box beef cut out values keep going up, and the negotiated cash price has dropped.... Everyone should make some money.... but the cow calf person and the backgrounders are the ones that are in the hole more often than not.

 

[Stocker Steve]

"Profit" is a popular word. Many get confused about it, particularly how land, management, and fixed costs are dealt with. What definition are you using?

 

[TerraceRidge]

Thanks Jan, I'll look that one up and watch it. Steve, I think the only real way to talk about profit is net profit after all expenses, depreciation, etc. is deducted. That's one problem (at least it seems like it is) with some of the numbers that we're seeing, including the Sterling Beef Profit Tracker. Maybe I'm wrong, but that looks to be to be just reporting the packer margin (the difference between what they pay per head and the total value produced), but it's reporting the cow/calf guy's net profit after expenses. One problem is that I can't imagine how expensive it would be to run a packing plant. Who knows - maybe it's actually really cheap. I just think that by the time you pay all the employees and pay for the building and keep it up to code, it's going to run into some money fast.

I do get that boxed beef is going way up and fat cattle are down - that doesn't make a lot of sense to me. It looks like there's no real competition between the packers. I think that's what the R-CALF lawsuit is about, right?