Beef Wrap March 25
The beef cutouts continued to work higher this week, although
probably at a slower pace than most were expecting. The Choice
cutout added $3.69 while the Select was up $2.40. Cash cattle
traded mostly steady, averaging $138.96, about $0.50 above last
week’s average. Packers reloaded their cattle inventory this week,
buying the largest number of negotiated cattle in almost six weeks.
They will get access to their April formula cattle next week, so that,
combined with the big trade this week, should keep them from
needing to be too aggressive next week. They will also get some
help from today’s Cattle on Feed report, which showed February
placements up 9.3% YOY when the trade was looking for something
closer to a 6% increase. That should pressure the futures lower on
Monday and should set a bearish tone that will allow packers to
avoid paying up for cattle once again. In addition to the large
placement number, today’s report showed overall feedyard
inventories up 1.4% from last year and very close to all-time highs
Feedyards are brimming with cattle and those cattle are excessively
heavy. USDA reported steer weights a little lower this week, but they
are still 14 pounds heavier than last year and declining very slowly
now. Cattle feeders need to keep the animals moving out of the
feedyard and that will limit their ability to advance cash prices. This
week’s fed kill was stronger than in previous weeks, clocking in at
511k, with packers scheduling a bigger Saturday kill than expected.
That additional production may test the cutouts’ ability to remain on
an upward trajectory. So far, the upcycle in beef demand has been a
bit subdued and that might imply that consumer demand is not really
as strong as it appears. We are seeing warmer weather across the
Southern states and that should bring out some grilling demand, but
price levels at retail are very high and consumers are dealing with
high prices in a number of other sectors of the economy.
Packer margins are slowly on the mend after a soft February and I
calculate this week’s margin at $296/head, up $30 from last week.
Going forward, the margin should continue to grow since I see beef
prices appreciating faster than the cattle market over the next couple
of months. It is not unusual for packers to see some of their best
margins of the year in May and that may very well be the case again
this year. At some point, if margins grow at a good clip, then packers
may toss cattle feeders a small increase in cash cattle prices, but
that isn’t a given. Cattle feeders had been counting on a tight supply
picture this spring to improve prices, but the window of opportunity
for that is growing rather small.
By my calculation, cattle feeding margins are in the red by about
$140/head and given what they paid for feeder cattle a few months
back and the high price of corn, they would need to sell the finished
cattle for almost $150 just to break even. That doesn’t appear to be
in the cards. In fact, breakevens are projected to rise further and
could be close to $155 by Memorial Day. It looks like cattle feeders
are once again facing a long stretch of poor profitability. Grain
markets aren’t showing any signs of backing down as long as the
war in Europe is causing serious concerns about how much planting
will get done this spring in Ukraine and Russia. Sooner or later,
cattle feeders are going to face reality and start pressuring cash
feeder cattle prices lower. Deferred feeder cattle futures prices look
way too optimistic if corn pricing is going to remain near $7.50 per
bushel and fat cattle prices are going to struggle to add even a little
to current levels.
The weekly export report provided by USDA this week was a mess
because one or more entities failed to report exports over a period of
time and so USDA just dumped that entire volume into this week’s
report. I guess the one thing that we can surmise from that is that
exports have actually been better than the prior data suggested
through much of 2021. USDA will give us the official export numbers
for February on April 6. I’m expecting a little more than a 20% YOY
increase. USDA also released Cold Storage totals for February this
week and it showed a modest, counter-seasonal increase with most
of the increase attributable to whole muscle cuts, not boneless beef.
That may signal that foodservice has been socking away more
product than usual in anticipation of higher prices this spring and
summer.
The combined margin seems to confirm that a new demand upcycle
is underway. The fundamental forecast has the Choice cutout
peaking in the $290-295 range just ahead of Memorial Day and that
should be when the next downcycle in demand begins. Next week,
expect the market to get off on a sour note as traders react to
today’s bearish COF report. Keep an eye on the cutouts to see if
they struggle under the weight of this week’s additional production.
If they do, that could be an early sign that this demand cycle is going
to underperform what we’ve seen in the recent past.
