Beef Wrap April 1
The beef markets continued higher this week, with the Choice cutout
gaining $5.06 on a weekly average basis and the Select adding
$6.22. As you might expect for this time of year, it was the middle
meat primals that led the cutout higher, but both cutouts were also
helped by soaring 50s prices. In the past two weeks, the 50s market
has gained $21/cwt and now sits at $131. It seems to me that this is
a demand-driven rally in the 50s, not a shortage of supply. Cattle
weights are quite heavy and so the carcasses should be generating a
lot of fat trim. Demand-wise, as consumers trade down from very
pricey middle meats, one of their targets is ground beef and that
means strong demand for both lean and fat trim. About 9 to 10% of a
cut-up carcass is 50% lean trimmings, so when they rally hard it really
helps boost the cutouts. I expect that fat trim prices will stay high at
least through Memorial Day and quite possibly for most of the
summer. There is almost certainly no relief coming next week given
that this week’s fed kill fell to only 490k.
That was down 15k from last week and more in line with kill levels in
two weeks prior to last week. To be fair, the flow model has pointed
to a dip in supplies during April and with cattle probably finishing
ahead of schedule, we shouldn’t be all that surprised if the light kills
came a little earlier than expected. It is probably a good thing that fed
kills are not all that big at present because my sense is that if kills
were much bigger, the cutout probably wouldn’t advance very quickly.
Demand is definitely in an uptrend and we can see that in the
combined margin chart and the daily demand scatters, but we are still
in the early stages of this demand cycle and it hasn’t gotten to full
steam yet. Retailers are asking consumers to pay some pretty high
prices for beef and that is likely going to be the stumbling block that
keeps this year’s spring rally well below what we saw last year. My
guess is that consumers will be a lot more interested in ground beef
than ribeyes this spring as they deal with price inflation in other areas
of the economy.
Further, the red flags are starting to go up about a potential recession
on the horizon and that is never good for beef demand. Honestly, I
think a recession is needed to cool down the inflation problem and the
red-hot labor market. But consumers are in no mood to think about
recessions right now. It is party time now that COVID infection rates
have fallen to almost zero. That is fine, but the party is going to be
expensive. Cash cattle averaged $139.36 this week, up about $0.50
from the week before. That makes it four weeks in a row that the
cash market has averaged below $140. Packers are focused on
regaining their margins and have little interest in paying up for cattle
right now. I calculate this week’s packer margin at $325/head, up $40
from last week. Cattle feeders don’t really seem to have enough
leverage to force cattle prices higher anyway.
Steer weights were down only 1 pound this week and they are still
15 pounds heavier than last year. I have to believe that they need to
keep the cattle moving out of feedyards and thus can’t bargain from
a position of strength with packers right now. That situation of poor
producer leverage is likely to get worse before it gets better. The
flow model is pointing to considerably larger numbers of marketready cattle during May and June than in April. My guess is that
cash cattle prices struggle to do much better than about $142 from
now until Memorial Day. Over the same period, I’m forecasting the
Choice cutout to push towards the high $280s or low $290s, so I
suspect that packer margins will move back close to $500/head
before June 1. The risk is that cattle prices tumble between now
and then and thus packer margins exceed my forecast. Feedyards
are full of cattle and they are heavy. USDA estimated feedyard
inventories as of March 1 were 1.6% higher than last year’s recordlarge number. There is a bulge in fed cattle supplies coming in the
May/June/July period—the result of strong placements late last year
and there is no stopping that train now.
Cattle feeders seem to recognize that there is a problem on the
horizon because it looks like they really slowed down placements
during March. That is fine, but it won’t provide much supply
tightening until Sep/Oct. In the meantime, high feed costs are
expected to keep cattle feeding margins solidly in the red all
summer. USDA released its Prospective Plantings report this week
and it showed that US farmers are planning to plant a lot less corn
than expected. That is unfortunate because the war in Ukraine is
likely to greatly reduce production in that area of the world and the
hope was that US producers could make up a chunk of that lost
production. Farmers are seeing huge price increases in nearly all of
the inputs needed to grow a corn crop, with fuel and fertilizer leading
the way.
The tight corn balance sheet is likely to keep corn futures well
supported into summer and they will be very vulnerable to any
issues that might arise in getting the crop planted. Normally, when
corn prices go up cattle feeders work hard to pay less for feeder
cattle in order to compensate. So far this year however, it looks like
they haven’t done a very good job with that and are over-paying for
feeder cattle given current corn prices. That is how they ended up
facing the prospect of negative margins from now until fall. Next
week, watch the fed kill to see if packers can get it back over 500k.
The following week is Easter and that will see lighter-than-normal
production on Good Friday and the Saturday following, so they may
try to boost next week’s kill to compensate. However, if the fed kill
remains down around 490k or less, the prospects for a stronger
cattle market this spring start to get more remote.
