Beef Wraps

Cash cattle averaged close to $119 this week, down about $2 from
last week’s average. The cutouts were headed in the other
direction, with the Choice gaining $11.60 on a weekly average basis
and the Select up $7.68. At the end of the week, the Choice cutout
was approaching $297 and yes, I had to revise all of the beef price
forecasts upward once again. The scary thing for beef buyers is
that the calendar is now rolling into May, which is when the really
strong beef demand normally appears.

I calculate this week’s packer margins were close to $735/head and
am forecasting next week’s margins near $800/head. It is really
good to be a beef packer these days. One interesting aspect of this
rally in the beef market is that the end meats are moving higher at a
time of year when they are normally shunned by consumers. I think
that fits with the idea that renewed consumer interest in high protein
diets is helping to fuel this incredible spate of demand strength.
Consumers following high protein diets will often deviate from the
normal seasonal consumption patterns, simply because they are
consuming so much protein that variety is desirable. The 50s were
the only item that didn’t contribute strength to the cutout, but by the
end of the week 50s prices were starting to move higher once again.
90s have been on a solid upward trajectory for months. With the
muscle cuts getting so expensive, I would look for retailers to start
putting more grinds in their ads over the next couple of months and
that should keep the trim markets relatively firm. The recent
weakness in the 50s may be tied to carcass weights not declining in
normal seasonal fashion this spring. 

This week, USDA reported steer carcass weights down 2 pounds,
but heifer carcass weights up 8 pounds. That means the blended
carcass weight moved higher—something that is not normal at this
time of year. The YOY chart to the right shows that blended weights
appear to following last year’s abnormal weight pattern rather than
declining rapidly toward a bottom in mid-May. To me, that is
somewhat confounding because nearby corn futures closed the
week at $7.40/bu and one would think that high corn prices would
prompt cattle feeders to tone down the energy component in rations
somewhat and that would be reflected in weights. That is not the
only unusual thing that cattle feeders are doing in this period of high
corn prices. They are also placing a high value on lighter weight feeder cattle.

Data from feeder cattle auctions over the past few weeks shows
that the price spread between light and heavy weight feeder cattle
is hovering near traditional levels. In times of high corn prices, it
makes financial sense for cattle feeders to shun the light weight
feeders and increase their demand for heavy weight cattle, which
require less corn to reach market weight. So, there are a lot of
things going on in the feedlot sector right now that don’t seem to
make a whole lot of sense.

This week’s fed kill registered 509k, down sharply from last week’s
total. It was still a little more than the flow model suggests should
be ready for slaughter at this time. We know that packers can
slaughter at least 525k of steers and heifers, because they have
achieved that level several times during the pandemic. So, why
didn’t packers attempt to reproduce last week’s 523k fed kill this
week when margins were well over $700/head? One would think
that with margins that strong, they would be trying to push every
animal they could through the plant this week. It is not like the
extra production is going to dampen the cutouts much, given they
way they have been roaring higher. More cattle will become
available during June, but the market has to make it through May
first. I don’t see any reason why the cutouts should soften much
over the next few weeks, but can see several reasons why they
should be stronger.

We are right in the midst of the explosive spring beef markets that I
have been warning about for months. Further, I suspect that beef
prices might come down some in June as kills expand, but they are
not likely to plummet and so beef buyers might find themselves
paying stronger-than-normal prices for a long time to come.
Export demand may soon come under pressure as many importing
countries such as Mexico, won’t be able to afford as much US beef
at these price levels. We saw a modest decline in export
movement in this week’s data. The futures market prices cattle
and not beef, so it has not rocketed higher as this spring market
unfolded. With the way that beef and cattle prices often become
disconnected by fat packer margins, it becomes very difficult to
hedge beef prices using cattle futures. The CME should rectify this
problem by introducing beef cutout futures similar to the pork cutout
futures that were introduced late last year and have been very
successful. Next week watch for the cutouts to move even higher
and the middle meats to take over more leadership in those gains.