Beef Wrap January 7
Cash cattle were mostly lower this week, with the weekly average
dropping a dollar to $138.58. It doesn’t look like packers bought
very many cattle either. That could be because some producers
didn’t want to let them go cheaper, but my guess is that packers
have so much uncertainty around their labor supply for the next
couple of weeks that they don’t want to over-commit on cattle
supplies. The cutouts were higher this week, with the Choice up
$2.98 on a weekly average basis and the Select up $3.25. I’ve been
saying that omicron would be the big story and that seemed to be
the case this week. Case counts are soaring and consumers seem
to be hitting the grocery stores hard. That has probably created
some additional fill-in business from the retail segment and moved
the cutouts upward.
Chucks, rounds and loins put upward pressure on the Choice cutout
while the ribs continued to be a drag on it. The surge in omicron
cases has created absenteeism all along the supply chain, not just
at packers. Trucking, distribution and retail are all dealing with a
shortage of workers. Packers are certainly seeing their share of
employees calling in sick and that has tempered the kill in recent
days and resulted in a number of daily slaughter estimates being
revised downward. The total fed kill this week only amounted to
485k, down from about 515k in the weeks just prior to the holidays.
Normally, the first week back from two holiday weeks would result in
a very robust kill, but not this year. It is almost like we had three
holiday weeks in a row. Next week might not be any better and I’m
penciling in another 485k fed kill. Even the cow kill was affected
with the weekly total there coming in at 135k, about 10k below what
I would have expected had packers been able to run like they
wanted. This just means that beef availability is going to tighten up
for at least a couple of weeks and I think we can expect the cutouts
to keep moving higher as a result. This kill slowdown comes at a
bad time for cattle feeders. I’ve already highlighted that carcass
weights have been running heavy and now they may stay heavy
longer than expected.
There was some cold weather in cattle country this week, but next
week is looking very mild and the amount of precipitation has been
very light. Thus weights could continue to be a problem and may
reduce cattle feeder’s leverage in the cash market over the next few
weeks. As a result, I’ve got cash cattle prices steady-lower through
January. Of course, if that comes true then packer margins will
widen back out again, because beef prices are likely to rise. This
week, margins clocked in at $350/head. Some observers are
wondering if the recent saber-rattling by the Biden administration will
cause beef packers to pay up for cattle even if they could get away
with paying less.
I guess that is possible, but I don’t really think packers are too
worried at this point. Every few years the packers come into the
crosshairs from activists complaining that they have too much
market power and that is hurting cattlemen. It never amounts to
anything. The appropriate way to deal with packer concentration is
through an anti-trust enforcement action and no one has ever been
able to produce enough credible evidence of collusion among
packers to make that a viable option. I doubt the current
administration will have any success in that area either. Now price
levels on all sorts of goods are going up and consumers are
bemoaning price inflation. If we get rid of the large packers and
their economies of scale and replace them with smaller plants that
have a higher cost structure, meat is going to cost more.
When a margin player like a beef packer has a higher cost structure,
he recoups that through some combination of higher beef prices and
lower cattle prices. Is that what cattle producers really want?
Probably not, cattle producers might very well find themselves
getting less for their cattle if the industry is comprised of lots of small
plants rather than a few large ones. The daily demand scatters have
indicated that spot beef demand is again moving higher, but the
combined margin made a tick downward this week. I’m thinking that
is just a brief anomaly and the combined margins will soon start
working higher. It is important to keep in mind however, that this is
just a short term improvement in beef demand and the longer-term
demand trend is lower. It is very doubtful that we can maintain the
level of demand from last year in 2022. Right now demand is still
pretty good, but my expectation is that the air slowly leaks out of the
demand bubble and by the second half of the year, demand is way
below what we saw in 2021. USDA released the official trade data
for November today and it showed beef exports up 7.6% YOY and
beef imports up a whopping 28% YOY. The quantity of imports was
almost exactly equal to the quantity of exports at 298 million pounds.
Mexico has been a big driver of US beef imports recently.
Per capita availability during November was 7.1 pounds per person,
up 6% from last year. Even though availability was way up this
November, the blended cutout was almost 25% above last year in
November. That is evidence of just how strong beef demand has
been. Next week, look for the cutouts to move higher on reduced
availability from this week’s small slaughter and the cattle market to
be steady at best.
