Beef Wrap April 2
Last week, the cash cattle market traded near $116 and this
week’s average looks like it will be closer to $118. There were
even a few trades noted north of $120, but those were probably
special case cattle. Nonetheless, the message is clear: the
cattle market is on the move higher. Packers seem to be OK with
this since the beef cutouts are now moving upward faster than
cash cattle. On a weekly average basis, the Choice cutout
gained over $12 and the Select was up a whopping $14. To say
that those gains are eye-popping is an understatement and it
feels like it is just getting started. Just last week I was talking
about Choice cutout that tops around $260 this spring. Well, as
of this afternoon the Choice cutout is only $7 away from that
target and April is only just starting! Clearly, that forecast needed
to be raised.
I’ve now got the top in the Choice coming closer to $280 and I’m
worried that might still be too low. The chart to the right shows that the
middle meats were the biggest contributors to the cutout’s gains
this week, but the round also made a significant contribution. Fat
trim is also adding to the rally, with 50s gaining $14 from Friday to
Friday. The fact that the middle meats led the rally is indicative
that buying for the spring grilling season is getting underway. In
fact, with pork so expensive lately, many of the retail ads featured
beef ribs as an Easter item this week.
That means there could be some fill-in business on the ribs early
next week that will move that primal even higher. In all, it just
looks really bullish from the beef side. The end meats probably
won’t be able to keep pace with the middles as the spring rally
lengthens, but it is worth noting that the briskets were up almost
$35 in the last five days. Wow, scorching hot! This is a huge
demand surge on top of what was already a strong beef market
and that can be seen in the combined margin chart to the right which
has gone parabolic recently. This big demand boost has naturally
been great for packer margins, which clocked in this week at
$460/hd. Now, here is the real scary part: If my cutout target of
$280 comes to pass, I can keep packer margins at or above
$400/hd and still have cash cattle prices top in the mid
$130s.
Is it possible that cattle feeders could push the cash market that
high in just a couple of months? Yes, definitely. That is because
we know from past placement patterns that available cattle
supplies are going to tighten in Apr/May and that will give cattle
feeders the leverage to move cattle prices upward in big chunks.
And packers won’t even care very much because they could still
have margins over $400/hd.
It has been so long since feeders have had any leverage at all that
I would expect they will try to make the most of any that they will
gain this spring. Now some will say that retailers won’t pay a $280
cutout, but they really have no where else to turn. Pork is super
expensive and chicken is pricey as well. Besides who wants
chicken for spring grilling? Beef is so much better and consumers
can’t really travel or dine out, so they will spend money for quality
beef. Further, with foodservice starting to re-open more fully,
retailers will need to fight to retain market share and the only way
they can do that is with attractive features. Chicken doesn’t fall
into the “attractive feature” category. Because retail prices lag the
wholesale market by a couple of months, it will be a while before
consumers actually have to face the stiff price increases that the
wholesale market put forth recently. Consumers will thus be
thrilled at the retail prices they are seeing and beef will go in the
shopping cart at a strong rate.
This week’s fed kill came in at about 480k, down 26k from the
week before and likely influenced by the Good Friday and Easter
holidays. That means a little less beef next week for buyers to
compete for. The kill may expand a bit next week, but I will be
surprised if the fed kill does any better than 500k per week
between now and Memorial Day. Carcass weights got back on
their downward trajectory this week and should continue to work
lower until mid-May or so. I fully expect that with the cutouts
moving higher so quickly that packers will try to pull hard on the
available cattle supply and that will keep downward pressure on
carcass weights. I have been warning beef buyers about the
potential for a red hot spring market for months now. Now, let the
chips fall where they may.
