Anyone who follows the margins for the various industry segments knows that losses in the packing industry have been mounting week after week, since about mid August. A relatively profitable week for the packing industry has seen them lose only $20/head.

Such an extended period of time of extended losses has been rare for the packing industry, which usually is able to correct its margins or at least narrow up its losses over time. This time around, however, there are a multitude of reasons the packing industry hasn't been able to do this.

For one, there's simply too much capacity, which is ratcheting up the competition for cattle. We are at the point in the cattle cycle where the packing industry usually suffers losses, but one can also attribute the situation to competition for market share between JBS Swift and the other packing conerns.

Whenever there is excess capacity chasing tight supplies, the market responds by paying more (encouraging more production) and/ or reducing capacity (until margins come back into line). Certainly, the industry will begin to expand, but with drought in the Southeast and Canada suffering the results of a weak U.S. dollar, whatever expansion occurs in the short term will be very limited.

That means the packing industry will have to reduce capacity. The question now is which packers will lose? All the packing companies have made major managerial shifts in the last few months, but the battle to maintain capacity has been intense. That's been great news for feeders and ranchers thus far, but an adjustment is coming.