Beef Wrap April 23
The cash cattle market felt soft again this week, but the weekly
average cash price for the live trade was only down about $0.70 to
$121.36. Part of the reason that it felt soft was that there were
some cattle feeders that accepted prices below $120, although the
average suggests there weren’t too many of those. The dressed
trade was decidedly lower, down over $3 from the week before to
$192.11. The beef markets were stronger yet again, with the
Choice cutout adding almost $7 on a weekly average basis and
the Select cutout up almost $4. When the beef goes up and cattle
prices go down, that is a sure sign the packer margin is growing
larger.
My calculation has packer margins this week at $606/head. The
drop in cattle prices has cattle feeding margins now in the red by
about $140/hd. Such inequity in this market. I had hoped that as
beef prices rose this spring, packer margins would hold around
$300/head and that would allow cash cattle to participate in that
rally, but apparently the social distancing in plants has reduced
throughput enough to where packers don’t have to compete very
hard to fill their kill schedules. Carcass weights are the one
fundamental factor that have been looking bearish lately. I’m
really concerned that they might not decline much more from
current levels and thus start their seasonal increase from a much
higher point than normal. That would be decidedly negative for
cattle feeders and decidedly positive for packers. With corn
futures now at $6.50/bu, one would hope that cattle feeders would
cool down the rations and not put a lot of extra weight on the
cattle. So far that doesn’t seem to be happening.
Packers were skillful at anticipating the spring cattle tightness
created by limited Q4 placements and they forward booked a lot of
cattle for Apr/May delivery. Packers are also pretty skillful at the
art of jacking up beef prices in periods of strong demand by
forward selling just enough that the spot market stays tight for beef
and that runs negotiated beef prices higher and all of the formulas
that are based on those negotiated prices also pay up. Packers
want to take full advantage of their margin improvement and they
did that this week by putting together a huge Saturday kill. The
weekly total on steer and heifer slaughter looks like it will be close
to 525k—about 30k more than what our flow model suggests
should be available right now.
Doing a kill that big before May even arrives creates some risk that
it will compress packer margins by lowering the cutouts next week
while making feedyards more current and increasing the odds of a
cash cattle advance next week. My guess is that demand is so
strong that the extra beef will be easily gobbled up by the market, at
least on the Choice side, and the cutouts will continue higher next
week. The Choice is now only $6 below my (revised) spring top
target of $290 and I fear that forecast will need to be raised to $300
soon. The combined margin just keeps working higher and is now
higher than the spring 2017 market, which was very strong.
This is going to end up being the strongest demand cycle in the last
five years outside of the COVID spike from last year. Pork demand
has continued very strong also. Retailers have no cheap options
for features this spring. My guess is they have already set their ads
for May and beef plays a big role in those. They may have to
increase their feature prices to help keep their margins from getting
crushed too much, but I really don’t think consumers will bat an eye
at higher prices.
I’ve said before, there is something very unusual going on in the
demand for animal proteins. This does not seem to me to be a
normal 6-8 week cycling demand. Demand is very, very strong
and will likely stay that way for at least a couple more months and
possibly for many more months. Buyers need to adjust and be
prepared to pay a lot more than they are used to for red meat items
this spring and summer. Adding fuel to the fire, today’s Cattle on
Feed report showed feedyard placements more than 5% below
what analysts were expecting. This week I raised all of my packer
margin forecasts in light of recent developments and that, of
course, lowered my cash cattle price forecasts. Next week watch
those carcass weights and the DTDS for some signs that cattle
feeders are seeing improved currentness. Also watch the cutouts
as demand gets tested by this week’s much bigger beef production.
