Beef Wrap January 28
Cash cattle traded steady to slightly lower this week, averaging
$136.93, which was $0.57 below last week’s average. Packers
couldn’t get too excited about buying cattle because the cutouts were
on the defensive for most of the week. However, both cutouts posted
a rally on Friday that erased losses from earlier in the week. On a
weekly average basis, the Choice cutout gained $0.11 while the
Select was up $1.99. Cattle slaughter improved some this week, with
the fed kill coming in at 495k, up 7k from last week. There is a sense
that the COVID-related absenteeism problems are beginning to
abate. That should enable packers to begin working through the 60k
or so cattle that were backlogged in early January, if they want to.
Right now their margins are pretty good, registering $535/head, down
only $15 from last week.
Our flow model is calling for February fed kills to average around
485k, so they could easily add 15k each week and thus clear the
backlog by the end of the month. However, with beef prices already
really high and the cutouts looking somewhat tenuous, packers may
have some reservations about expanding the kill much beyond what
we saw this week. No need to force the cutout down any faster than
it might already be scheduled for. This week saw FI steer weights
drop six pounds, but heifer weights were unchanged. That took
blended carcass weights down three pounds, but they still are quite
heavy. The DTDS carcass weights are holding near +10, which is the
heaviest they have been in almost a year. That makes me think that
feedyards are not all that current. Packers are happy to pay steady
money for cattle as long as the cutouts are allowing for a fat profit
margin. Once the cutouts start to fall significantly then the risk to
cash cattle prices increases. This week, the loin cuts were the
biggest gainers in the cutout. My sense is that beef demand at retail
remains good because consumers are staying home a lot more than
they did back in December.
Consumers pulled harder than expected on beef out of the meat case
and that has left retailers with some gaps to fill. However, the worm
may be about to turn on the demand side and the combined margin
seems to be indicating that we are near a local top with respect to
demand. COVID cases are now trending lower and that should
accelerate in the next few weeks. I expect people to venture out of
their bunkers and they will be less concerned about stocking up on
beef at the grocery store and more concerned with enjoying social
activities once again. As a result, I’m forecasting the cutouts to work
lower in February. I have the Choice cutout bottoming in the
$275-280 are in early March and then I think we can expect spring
demand to start to lift the cutouts once again. Buyers should be
looking to fill middle meat needs during February as prices soften in
anticipation of price increases this spring.
End meats have a lot less upside potential in the spring, but also may
not come down much during February. Ground beef is likely to
remain a favorite that retailers can use to lure cash-strapped
consumers into the store during February. I’m expecting fed beef
production in Q1 to be down about 0.7% from last year, with the
recent COVID-related slaughter slowdowns factoring into that. Beef
exports should remain relatively strong, down only 1.4% in Q1 from
last year’s strong number, but imports are projected to be 9.5%
above last year. That will put imports nearly equal to exports and
mitigate any price benefit the strong export market might have
afforded. With strong imports, I’m looking for per capita beef
availability to be about 0.7% stronger than last year and last year the
Choice cutout averaged $229 in Q1.
Of course, last year at this time the demand train had not yet left the
station. This year in Q1 demand should be much stronger and thus
that leads me to a Q1 Choice cutout forecast of $282, even though
availability will be slightly larger. Last Friday’s COF report showed
December placements up 6.5%, which was well above the 2.5% that
analysts were projecting. As expected, the futures market sold off
hard on Monday and was helped along by a bloodbath in the equity
markets. Cattle futures are relatively sensitive to the state of the
economy and when the stock market takes a big dive it usually brings
out some cattle bears. For most of the week, the stock market was
gyrating up and down in big chunks and that led to some pretty strong
cattle moves in both directions. In the end, the futures found some
solid footing on Friday and all contracts finished the week higher than
the week before. The grain markets posted strong gains this week
and are back near the highs they hit last summer. Strength in the
grains normally supports the deferred cattle futures because traders
assume that eventually the high price of corn will get passed along
the supply chain in the form of higher cattle prices.
Next week, we will get the annual cattle inventory report which will
give us a snapshot of herd size and form the basis for most of the
2022 supply estimates. It is widely expected that inventory numbers
will be lower as we are still in the liquidation phase of the cattle cycle.
I don’t think the report will show any significant signs of heifer
retention, which normally signals that liquidation is coming to an end
and higher prices are on the horizon because producers will be
holding back females. I believe that is still at least a couple of years
into the future. Next week, watch the cutouts for further weakness,
which would indicate that retail demand is starting to cool after a
relatively strong January.
