Beef Wrap May 7
Cash cattle traded in the $117-119 range this week, with the
average coming in at $118.35—about $0.50 below last week. The
beef markets kept screaming higher, with the Choice cutout gaining
$11.70 and the Select up $7.56. Those increases were bigger than
what I had dialed in and therefore some upward forecast revision
was necessary. I now have the Choice cutout topping around $314
in a couple of weeks. My guess is that if I’m wrong, I may be too
low on that because these next two weeks in the middle of May are
typically the best demand weeks of the year.
Consumers want to get outside and grill and supermarkets cannot
afford to be out-of-stock on beef. That means that they will pay
whatever it takes to keep the meat case full. Restaurants also do a
brisk business at the end of May, with graduations featuring
prominently. That will keep restaurants in the mix bidding for beef
and thus it makes sense to me that the market continues to move
higher. However, by the time the third week in May is complete, it
will be too late to get product into grocery stores for Memorial Day
features and so demand from that channel could fade a bit and
allow the cutout to pull back some. I don’t think it will be a huge
collapse in the beef market because Father’s Day is just around the
corner also and if Memorial Day clearance is good, retailers will
need to reload for ahead of Father’s Day weekend. So, it is
possible that we could see a sub-$300 Choice cutout again by the
middle of June, but it might not be much below $300 and would still
be a very robust pricing environment.
As I’ve said before, there is more to this strong beef rally than just
the normal grilling season demand. The chart below illustrates this
point because all of the primals participated in this week’s rally. If
this were simply a grilling season rally, we would see the middle
meats higher, but the end meats lower. The fact that demand for
chucks and rounds are so strong at this time of year is clear sign
that something out of the ordinary is going on. Vaccination rates in
the US continue to rise and new COVID cases are in decline. The
population is starting to sense that things are quickly moving back
toward normal and, after a year sequestered, people are ready for a
big party. Memorial Day is in the right place at the right time.
Another contributing factor will be rather light beef production over
the next few weeks. This week’s steer and heifer kill only amounted
to 502k, down from last week’s 509k. If we go back and look at fed
kills during early May of 2019, they were running around 535k head.
So, its pretty clear that availability is going to be down from normal
during the peak of grilling season.
Carcass weights moved lower in this week’s data and there are
indications that they will print lower again next week. That makes
me hopeful that blended steer and heifer carcass weights will soon
dip below last year and continue lower in normal seasonal fashion
until the end of May. So, the carcass weight picture doesn’t look
quite as bearish as it did a couple of weeks ago. It is still not great,
but better. My calculation puts packer margins this week at $835/
hd, with a good chance that they move over $900/hd next week.
Packers must be very pleased with this situation and cattle feeders
are dejected. These huge margins probably reflect the fact that
packing plants just cannot process the same volume of cattle that
they did in the pre-COVID days due to social distancing and
difficulty keeping the plant fully staffed with workers. Cattle feeders
under-estimated the impact that COVID would have on plant
throughput and they put more cattle on feed than plants could
comfortably handle. That swung the leverage meter strongly in the
packer’s favor and helped produce the super-large packing
margins and super-dismal feeding margins that we’ve seen in the
past year.
There are only 2 paths out of this situation: find more workers or
reduce the number of cattle on feed. If packers want to find more
workers in this environment, they will probably need to raise
wages. Since packers are pure margin players, any increase in
their costs eventually get passed along to both consumers (through
higher prices) and primary cattle producers (through lower prices).
Just how much of the burden each segment bears depends on the
slopes of the supply and demand curves. The remedy of paying
workers more eventually leads to a smaller beef industry because
some primary producers leave the business and because
consumers will consume less beef at higher prices. Reducing the
number of cattle on feed essentially does the same thing, pressing
down on feeder cattle prices and raising fed cattle (and thus beef)
prices.
Clearly, cattle feeders need make some changes in the way they
do things if their margins are consistently running deep in the red
while packer margins are huge. The futures market was mostly
stronger this week, but not before the Jun contract traded all the
way down to $112.57 on Tuesday. After that, Jun rallied hard to
finish the week at $116. Next week, watch the cutouts as they
should add another $5-10 on strong demand and also keep an eye
on weights. Hopefully they will post another significant move lower.
