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|Cargill axes beef plant, giving up on herd revival
By Agrimoney.com - Published 17/01/2013
Live cattle futures plunged their daily limit after Cargill revealed it was closing one of its beef processing plants, after giving up on a rebound in US cattle numbers from 60-year lows.
The agribusiness giant, one of the world's biggest privately-owned companies, said that it would at the start of next month close its Plainview, Texas site, which employs 2,000 people.
The "difficult" decision to close the site, which processes some 4,500 animals a day, followed "an exhaustive analysis" of North America's cattle supply and processing capacity, which highlighted the threat to industry profits from a US herd which has shrunk to its lowest since 1952, Cargill said.
The prospect of consolidated buying power weakened cattle futures, but sent shares in Tyson Foods, a major rival to Cargill in US meat, up 3.8% to \$21.23, their highest finish since September 2007.
No revival for a while
"Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry," said John Keating, president of Cargill Beef.
"We delayed the decision to idle Plainview as long as possible. We were hoping the drought would break, pasturelands would be restored, cattle ranchers would retain heifers and the national herd trend of declining numbers over the past few years would be reversed.
"Unfortunately, the drought has not broken, feed costs remain higher than historical averages and the herd continues to shrink."
While Cargill that it was "optimistic about the long-term prospects for US beef demand", and was to retain the Plainview site for a potential reopening if US cattle numbers rebound, the group said that it "does not expect the US cattle herd to significantly increase in size for a number of years".
More than other states
The US cattle herd fell below 90m animals last year for the first time since the 1950s, and down from a 1974 high of 132m head, according to US Department of Agriculture data.
The Texas herd has shrunk particularly fast, dented by drought last year and in 2011, besides the high grain costs which affected the industry around 2007-08 as well.
"Texas cattle numbers have gone down more than any other state," Ben Parks, at FCStone's Kansa-based livestock division, said.
Being a distance from the main Midwest corn-growing areas, "feed costs are perhaps 90 cents a bushel over futures in Texas, compared with maybe 30 cents a bushel in Nebraska".
'Something was going to give'
Mr Parks added that Cargill's announcement had caught markets unawares.
"It was not a surprise that there was a closure at some point this year. But by Cargill, and today, that was a surprise," Mr Parks told Agrimoney.com.
"We felt something was going to give, but did not know where or when."
Live cattle futures for February fell the 3.00-cents a pound maximum in Chicago before recovering to close at 126.60 per pound, down 1.925 cents, or 1.5%, on the day.
Return to profit
Beef packer margins on Thursday were some \$37 per head in the red, according to HedgersEdge.com.
Cargill's closure will enable it to send increase volumes handed by its Friona plant, less than 100 miles from Plainview, besides send extra volume to sites in Kansas and Colorado too.
Cargill last week reported a return to profit at its animal protein operations, "compared with a loss last year when processing margins in the US beef industry were sharply negative".
"Most of the meat businesses benefited from improved volumes or margins in the current period, even though results were tempered by higher raw material or livestock feeding costs," the group said, as it unveiled a sharp recovery in group profits.
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