The Wall Street Journal-20080130-Cattle-Market Psychology Shaken by Plant Closure

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Cattle-Market Psychology Shaken by Plant Closure

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Tyson Foods' decision to cease cattle-slaughter operations at its Emporia, Kan., plant is pressuring the psychology of the cattle market, cattle analysts and traders said. However, there is some debate on whether it should.

"A plant closure is never bullish," said Andrew Gottschalk, livestock market analyst at HedgersEdge.com and R.J. O'Brien.

Tyson said Friday it will end cattle slaughtering at the Emporia plant, but that it will retain the facility as a cold-storage and distribution warehouse and will process ground beef there. It also will keep the slaughter facilities intact, essentially mothballing the capacity.

In a research note following Tyson's announcement, Credit Suisse analyst Robert Moskow said while "Tyson is demonstrating leadership by doing the right thing for its business and for the industry, perhaps the biggest winner here is competitor JBS-Swift" & Co., a unit of JBS SA.

When JBS Swift added a second shift at its Greeley, Colo., plant shortly after purchasing the company last summer it added 2,000 to 2,300 head a day in slaughter/processing capacity, increasing competition for fed cattle. Many market analysts agree the industry already had too much capacity for the number of cattle being raised, and JBS Swift's move to grab more market share of the beef market only made it worse.

Mr. Moskow said beef-packer margins "fell from losses of $5 to $10 per head in July-August to minus $70 a head in November" after the second shift came on line in early September.

Closing the Emporia plant will remove 4,000 head a day of slaughter capacity from the industry, so on the face of it, the closure looks like it should pressure the live cattle market, the analysts said. Its closure will decrease industry slaughter capacity by about 2,000 head from the time before JBS's Greeley addition.

"Perhaps industry packing margins can return closer to break-even following this step," Mr. Moskow said.

Mike Leheska, market analyst and broker with Amarillo Brokerage, said the psychology of removing that slaughter capacity "means a whole lot" to the markets.

Don Close, independent market analyst and trader, said traders shouldn't pay much attention to the Emporia closure because the industry will still have unutilized slaughter/processing capacity. In addition, the Emporia plant was out of position with regard to where the bulk of the cattle are fed for slaughter.

Emporia is located in east-central Kansas, and the bulk of the cattle are fed in the southwestern part of the state. The resulting transportation costs to get the cattle to the plant added up, Mr. Close said. However, he didn't think adequate attention was paid to the highway access to get the product out, since it is located near the junction of Interstate 35 and the Kansas Turnpike.

Last week, the U.S. Department of Agriculture estimated total U.S. cattle slaughter at 640,000 head.

The five-year peak slaughter was on June 6, 2003, at 793,000 head, Mr. Close said. The industry hasn't slaughtered more than 713,000 head in the past three years.

Mr. Moskow said higher feed costs and scarcity of forage are reducing incentives for ranchers and feeders to invest in beef.

Tyson officials said Monday margins were improving. It also projected that cattle supplies would rise in the second quarter to improve the bottom line even more.

However, J.P. Morgan market analyst Pablo Zuanic said in a note that Tyson's plant-closure move and its outlook on margins helped its near- term outlook for meat stocks, the long-term outlook still made him favor the chicken stocks.

Live cattle futures at the Chicago Mercantile Exchange traded lower Monday, with only back months recovering late in the session, with traders citing the bearish implications of the idled slaughter capacity. Yesterday, futures recovered a bit, with February futures gaining 40 cents to $91.15.