Want a hot stock tip? Consider buying Hormel and Kraft.
Actually, I'm not in the business of recommending stocks but I can't help reflecting that these companies make two of the hottest-selling food items right now: SPAM and mac & cheese.
Maybe that's why beef packers were a bit gloomy at their recent annual convention. The confab was in Las Vegas, which seemed appropriate given the tough odds packers face of making money this year. I dined out one night and two things struck me. The price of a beef entrée at a white-tablecloth restaurant is still outrageously high, and the Vegas Strip was eerily quiet. Yes, the economic crisis has hit Sin City.
People eat a lot of beef in Vegas. So the reduction in visitors is a microcosm of how restaurants nationally are suffering, and how that's hurting beef demand.
OSI Restaurant Partners, which operates Outback Steakhouse and Fleming's Prime Steakhouse chains, reported that sales for its 2008 fourth quarter were down nearly 10% on the year before. Outback's sales were down 9.5% and Fleming's were down 19.6%. Outback has now rolled out 15 meals under $15 to lure back customers. Most of these items aren't beef.
Therein lies beef's predicament. Boxed-beef prices (at least in early March) were 10% below last year's levels. But pork and chicken are even cheaper, which is why consumers continue to trade down in their protein purchases in grocery stores.
Beef by-product values are 40% lower than this time last year. These values are how packers cover their variable costs. That's why packer margins went red in early February when boxed-beef prices fell, even though packers bought cattle cheaper.
Packers are now considering several ways to improve their margins without relying on the price spread between live cattle and boxed beef. They are considering running only five days a week and not operating at all on Saturdays, except occasionally this spring/summer. They're looking at cutting fixed costs as much as possible.
JBS showed after it bought Swift & Company that it is possible to save a lot of money. Packers I speak to say they're trying to return to running “bare bones” operations without compromising food safety and product quality.
Packers are also looking at new ways to improve meat yields and not give anything away. For example, one packer with a very large ground beef operation has started using a European fat-detector machine. It measures the fat content of ground beef so accurately that, after installation, it saved the packer $75,000/day at one plant. The plant was giving away too much lean (meat) in its grind. The machine paid for itself in less than two weeks.
Packers are also looking at ways to reduce their exposure to commodity-market fluctuations. They're starting to employ computerized pricing systems that do everything from calculating how to price meat at the start of the week to helping determine at what level to run plants.
Packers are also considering more supply programs with cattle feeders to gain a more consistent flow of cattle and to improve the overall quality of their raw material. A key element of National Beef Packing's success is its relationship with majority owner U.S. Premium Beef, whose members provided National with 19% of its cattle in fiscal 2008. National has other key suppliers that provide high-quality cattle. Just 25 suppliers, excluding USPB members, supplied 42% of all its cattle in 2008.
Speaking of National, it's extremely unfortunate that a U.S. Department of Justice complaint caused JBS to abandon its proposed acquisition. This was going to be a $970-million equity injection into the U.S. beef industry that it could ill-afford to lose. The industry desperately needs an efficient, profitable processing sector to keep beef affordable to consumers.