Sort & Cull

While the specifics of Cargill's decision this week to close its beef processing plant in Plainview, Texas, took the market by bearish surprise, no one who has been paying attention to the dwindling size of the cow herd over the last decade or so can truly describe the plug-pulling as "unexpected."

Since the turn of the century, the beef factory has been remodeled to accommodate 4.2 million fewer mama cows. Accordingly, annual calf crop size has faltered from 38.6 million head to 34.5 million.

Although this relentless downsizing in cattle numbers naturally required fewer infrastructures to ultimately deliver steaks and hamburgers to hungry consumers, only a disproportionate crowd of packers and feedlot managers were willing to throw in the towel.

Many of these middlemen resisted scaling back, choosing instead to bet that herd liquidation would soon be reversed by expansion plans, allowing their expensive fixed capital to once again be justified in terms of efficiency and manageable overhead.

Some of these guys are still painfully waiting. Apparently, Cargill simply ran out of patience.

Packer margins ran well below long-term averages throughout 2012, and prospects for processing black ink in 2013 did not look much better -- at least not until Cargill "volunteered" to unilaterally reduce the nation's total kill capacity by about 4,500 head on a daily basis.

In theory, this is good news for packers still in the game, not so good news for cattle feeders who now face a smaller beef processing appetite in need of satisfaction.

I say "in theory" because it remains to be seen exactly how much leverage cattle buyers stand to gain in the months ahead with only one plant (albeit a big one) dark. While regional procurement may be an easier task, it's possible that any shift in leverage (i.e., from feedlot to packer) could be minimal.

If beef demand is strong enough, processors could still themselves struggle to fill too much shackle space with too few ready steers and heifers.

Put another way, cattle feeders could still benefit from aggressive procurement even after the workers at Plainview have scattered. If beef prices and volume is right, the packer club will not have much trouble in picking up Cargill's slack.

Overcapacity can be an extremely expensive problem, especially if your biz is working the wrong side of the street (e.g., excess chain speed is the packer's enemy, but the feedlot's friend; shrinking feeder cattle supplies are the feedlot's enemy, but the rancher's friend).

Cargill took a dramatic step in addressing the problem. While I think the agri-giant is right in doubting herd expansion anytime soon, I hope its assumptions of relatively mild beef demand are dead wrong.

If slower chain speed capacity is married to disappointing product demand, 2013 could be shaping up to be another long year for cattle feeders.

For more John Harrington comments, visit http://www.feelofthemarket.com/…

(AG)

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