Where's The Beef??? Packers Profitability
“What’s good for Cargill and its peers, however, is a headache for consumer goods companies and ultimately households, which face the highest food inflation in a decade,” Javier Blas August 6, 2021 Bloomberg News article.
By Robert Thomas
Part Seven of a Series
With the consolidation of the Canadian beef packing industry to achieve economies of scale there is presently two major players - Cargill Proteins and JBS - who control the lion’s share (85 percent) of the beef processing industry.
Cargill the Biggest and Private
The title of the largest beef slaughter and processing capacity in Canada goes to Cargill Proteins.
At their two Canadian beef processing facilities - High River, Alberta and Guelph, Ontario - Cargill Proteins has a combined slaughter processing capacity of 6,200 head of cattle daily.
Cargill Proteins is one of the companies held by Cargill Incorporated a US based privately held international food conglomerate. Cargill is the largest private company in the United States and has approximately 155,000 employees world-wide. Cargill is controlled by the heirs of William Wallace Cargill who started the company in 1865.
Being a privately owned and operated conglomerate Cargill is not compelled to provide public disclosures to investors. Cargill has taken this ability to heart and in June 2020 announced it was no longer providing quarterly reports - something it had been doing since 1996.
At about the same time as quarterly disclosures were discontinued on July 21st 2020 Bloomberg News published details about a record payout to the 125 Cargill family members. The Bloomberg News report gave credit to Cargill’s animal protein division, including beef packaging, as driving the record profits.
“Alongside its peers, Cargill has been able to make money from volatile markets buffeted by the impact of the U.S.-China trade war and the coronavirus pandemic, plus profit from its long-term bet on animal protein, including beef packaging, fish and poultry,” the Bloomberg story read.
Cargill received recognition from the McDonalds Corporation in the United States for ensuring that hamburgers remained on the menu during the pandemic - MJ Independent photo
Although it is unclear if a special dividend was part of the biggest payout ever to 125 Cargill family members dividends to stockholders surged to $1.13 billion, up 76 per cent from $643 million from 2019, Bloomberg News reported.
According to their 2021 annual report Cargill worldwide had $134.4 Billion USD in revenue a 17 percent increase and up from the $114.6 Billion USD in 2020.
When it comes to commodities including beef being sold to China Cargill is a major player and has been earning record amounts on Chinese sales. The rising demand for beef in China has driven Cargill Proteins profitability.
In a November 22, 2021 statement in a Western Producer story Cargill gave its reasons for the price differential between live cattle and the price of beef sold to retailers.
A statement blaming high retail prices in part on a labour shortage.
A marketplace of supply and demand at both the input farmgate side of the equation and a separate supply and demand market for the wholesale beef marketplace.
“In part due to a shortage of labour, the industry is not currently able to process as many cattle as ranchers are able to produce. This, when combined with other backups of cattle due to COVID/weather events, plus an increase in demand for beef, accounts for the disconnect between live cattle prices and wholesale beef prices.”
In a January 2022 report the Farm Credit Corporation said the rising cost of beef and decreased incomes during the pandemic had Canadian consumers switching away from more expensive meals which included beef. - MJ Independent photo
During its 2021 fiscal year Cargill - throughout its many divisions, including its beef packing division - earned yet again another record profit in a volatile commodities marketplace.
According to Bloomberg News until the end of May, 2021 Cargill had nearly $5 billion in net income a record in its 156 year history - beating the record set a year prior in 2020.
Growing demand from China for commodities - including meat - helped pad Cargill’s bottom-line Bloomberg News reported.
During the summer of 2021 farmers were selling cattle and culling their herds due to the drought and a lack of feed. The desperation Western Canadian producers were feeling due to the affordable feed shortage even made it to the New York Times.
At the same time as producers were desperate to sell their cattle due to the drought and the lack of affordable feed the retail price of beef, year over year, in Saskatchewan retailers took a massive jump according to Statistics Canada data.
Percentage wise meat prices were 10.8 percent higher in June 2020 versus June 2019 whereas the price of beef led the way in Saskatchewan grocery stores with June 2020 prices up 25.2 percent versus June 2019. (See chart below).
Average retail meat prices in Saskatchewan in 2020 versus 2019 - source Statistics Canada
Higher prices, less income, inflation and the struggling restaurant sector has in the past and presently weighed down meat demand - including beef.
During the pandemic year of 2020 following the CERB (Canada Emergency Response Benefit) becoming readily available in April 2020 the demand for beef seemingly increased in unison with the CERB payouts. By the end of June as Canadians had income despite lockdowns and job losses and coincidently the availability of CERB matched the turnaround in demand for beef.
On March 18, 2021 the Saskatchewan government (amongst other provincial and federal governments) declared a state of emergency effectively resulting in mass business closings and job losses which coincided with decreased demand for beef.
According to a January 2022 Farm Credit Corporation (FCC) report Canadian consumer demand during 2020 (a COVID - 19 pandemic year) was initially on the decline but after the first quarter Canadian consumer demand for beef rose for the remainder of 2020.
The demand for chicken decreased during 2020 in Canada which was matched by the increased demand for beef. The increased demand for beef during 2020 was also during a period of increasing meat prices - especially for beef.
In 2021 the demand for chicken increased due to restaurant re-openings as well as “perhaps higher red meat prices inducing substitution away from red meats,” according to the FCC report.
High international prices for beef saw Canadian consumer demand decrease for beef while at the same time the Canadian demand for lower priced (pound to pound) of chicken versus beef saw a rebound in the demand for chicken and a corresponding decrease in demand for beef in 2021. (See chart below.)
The FCC said overall meat consumption and demand is on the decline in Canada. Lower household incomes, soaring meat prices hit by inflation and restaurants struggling financially are driving decreased meat consumption in Canada.
Consumer demand for beef in 2020 mirrored prices at grocers and retailers for beef - source Farm Credit Corporation January 2022 report
With the increase in Canadian consumer demand for beef in 2020, plus soaring retail prices and foreign demand, the cow calf return producers were receiving was flat staying the same as it had pre-pandemic in 2018 (see chart below).
In 2021, when producers were forced to sell of a large number of cattle due to drought, the returns producers received plunged. In the first quarter of 2022 the proceeds producers received was in negative territory.
Despite the numerous claims there is collusion in live cattle pricing or a few firms controlling the market Cargill denies any such actions. They chalk it all up to free market forces of supply and demand.
“It is a supply and demand driven market, and so to suggest that there’s manipulation or taking advantage, I just don’t agree with it,” Chief Executive Officer Dave MacLennan has said in prior media interviews.
At the present time Cargill is facing anti-trust allegations in court about price fixing in many sectors of the meat processing industry including - beef, chicken, turkey and pork - in the United States. None of the allegations have been proven in a court of law.
MJ Independent attempted to get comment from Cargill Proteins and we were referred to the Canadian Meat Council (CMC) (who represent federally inspected Canadian meat packers both big and small) for comment.
The CMC said they do not comment on individual prices paid by processors but they did offer to take a list of our questions and respond once the group’s director returned from vacation.
Our questions - we sent by email - asked about the benefits to the industry by consolidating from 57 plants in 1975 to three in 2022, the concerns raised by the Saskatchewan Stock Growers about what producers are receiving for their cattle, the effects of COVID on packers and the market, a response to claims of collusion in the industry and the competitiveness of Canadian beef in the world market due to a packer processing industry with three plants and two main players.
MJ Independent did not receive any further response from the CMC.
Due to the non-response MJ Independent used statements made by Cargill in other readily available sources in this series of stories.
JBS at Brooks, Alberta
Unlike the privately family held Cargill group of companies - which includes their meat operations Cargill Protein - the Brazilian based JBS is a publicly traded group of corporations which must release quarterly and annual reports for investors, bond holders and bankers.
One thing needs to be noted, when it comes to beef JBS is a giant in the North American market. In 2019 JBS was the worldwide largest beef company. JBS is a worldwide company but the JBS USA Beef - which includes Canada and Australia - is the company’s largest division.
How the large beef packers view cattle as a raw material - source JBS 2017 annual report
The company grew to this size - not just because of its slaughter capacity - but due to diversified products often through acquisition and further consolidation in the beef supply chain.
In 2018 JBS USA Beef posted record high results.
Net revenue of R$78.6 billion was posted in 2018 (R denotes Brazilian Real), an increase of 13.7 percent year-on-year. Pre-tax earnings reached R$6.3 billion, 53.6 percent higher than 2017.
In 2019 JBS USA Beef (which includes both Canadian and Australian units) had revenue of R $87.2 Billion which is 10.9 percent more than 2018.
JBS USA Beef had an EBITDA of R$ 8.0 billion, 27% higher year-over-year, with a margin of 9.2%.
EBITDA denotes earnings before interest, taxes, depreciation, and amortization (used as an indicator of the overall profitability of a business).
Financial results from 2019 to 2020 show decreased revenues but increased profitability for JBS USA Beef which includes the United States, Canada and Australia - Source JBS 2020 annual report
Despite reduced production - due to the impact of the COVID - 19 pandemic - strong domestic and foreign demand propelled JBS USA Beef to more record financial highs in 2020.
USA Beef (including operations in Australia and Canada) produced net revenue of R$112 billion for the year, up 28 percent on the year.
.Adjusted pre-tax earnings reached R$12.9 billion up 61 percent year-on-year, while net revenue reached USD $21.7 billion, down 1.7 percent.
The last full year 2021 results for JBS USA Beef shows another financially banner year.
JBS USA Beef had a net revenue of R$146 billion and pre-tax earnings of R$26 billion, up 101 percent on the previous year.
In their 2022 first quarter report to investors JBS Beef North America reported a net revenue increase of 21.7 percent compared to the 2021 first quarter results.
According to a July 8, 2022 news release - where JBS announced a partnership to provide a $71 automated warehousing system to reduce costs and errors - JBS’s Brooks beef facility supports more than 500 local producers, paying them $1.6 billion per year for their livestock.
MJ Independent attempted to get comment from both Cargill Proteins and JBS in Brooks, Alberta.
JBS failed to respond to MJ Independent’s requests for an interview to hear their side of the story.
So are packers the real culprits when it comes to taking advantage of producers and consumers alike? Or is something else behind what has happened in the Canadian cattle and retail beef markets?
Could it be the war in Ukraine as some claim? Or is it something else given the present escalated hostilities never started until February 2022 and flat live cattle prices and high or increasing consumer prices pre-date it by years?
These are questions only a federal or provincial government investigation can seemingly answer.