Beef Wraps

The cash cattle market took a step up this week, with prices
averaging just over $141, up $2 from the week before. The
cutouts were mixed, with the Choice gaining $1.99/cwt while the
Select lost $1.64/cwt. That had to be a disappointment for
packers, after recent weeks where the cutouts have been gaining
$5 or more. So, if the cutouts were so sluggish, why did they pay
up for cattle? That probably has a lot to do with the fact that they
are going to be delivering on big forward sales for the next two
weeks. I’ve included a chart of estimated deliveries on forward
sales that I derive from the comprehensive beef reports that
USDA releases weekly. You can see that that the next two weeks
have a big delivery commitment and that often will tie packer’s
hands with respect to the cash cattle market. Packers are much
less likely to risk a showdown with cattle feeders when they have
large orders to deliver on in the near future. Obviously, retailers
are planning for big beef features in the two weeks after Easter.

The big slug of booked orders to be delivered next week might
also explain why buyers were not very aggressive in the spot beef
market this week. Those buyers that were active in the spot
market this week were more interested in middle meats than end
meats. The rib and loin primals were responsible for nearly all of
the gains in the Choice cutout this week. Even the 50s market
cooled a bit this week, with prices down about $6/cwt on a weekly
average basis. This week’s slow market is jeopardizing my
forecast of $295 for the spring top in the Choice cutout. I still think
that the market can get there, but the odds of it falling short are
increasing. Packer margins were up $16/head this week to $350,
but there is a real risk that margins will be down a little next week
when the more expensive cattle show up at the packing house.

With all of that product the booked product that needs to be
delivered, packers had better get busy putting blood on the kill
floor. This week’s fed kill was light because of Easter, coming in
at 494k. That was down 20k from the week before. Look for
packers to step it up next week and we will probably see the fed
kill grow week after week until Memorial Day. The kills in June
could be even bigger than those in May. USDA reported steer
carcass weights down only one pound this week, which takes
some of the edge off of the prior week’s six-pound decline. As a
result, carcass weights still look overly elevated and that is likely
to limit how much the cash cattle market can advance over the
next couple of months. Jun futures are trading about $5 discount
to this week’s cash, so clearly futures traders are not optimistic
that cattle feeders will be able to move cash prices higher as market-ready supplies increase
strongly in the next two months.

Domestic beef demand is still in a
seasonal uptrend and the combined margin reflects that.
However, the rate of increase in the combined margin currently is
not as impressive as some recent upcycles. That fits with my
thought that beef demand is going cool as we move deeper into
2022 and consumers deal with high energy prices and rampant
inflation in other parts of the economy. The attached chart shows
the results from a recent Harris poll on what areas consumers
foresee cutting back on due to inflationary pressures. Eating out
less was the number one activity consumers plan to curtail. I
guess they honed their cooking skills during the pandemic and so
they are more comfortable eating meals at home even though
COVID infections are very low. This could actually be a positive
for domestic beef demand because we know that demand soared
when infections were high and people were forced to spend a
larger proportion of their food budgets on at-home meals.

This time around it will be inflation that keeps them out of
restaurants, not COVID. However, people often say one thing on
a survey and do another. I want to see data showing restaurant
sales declining before I believe that consumers are cutting back
significantly on dining out. Overseas demand for US beef still
looks rather healthy based on the weekly FAS data. Corn prices
continue to increase, with cash corn in the cattle feeding areas of
Kansas now running a little over $8/bushel. That is going to keep
feedyard breakevens elevated and I calculate that cattle leaving
the yard today need to bring almost $152 to breakeven. Of
course, they won’t get anything near that this summer, so the long
stretch of negative feedyard margins is likely to continue. At
some point, cattle feeders will cut placements in response to poor
margins and that is probably what traders are thinking when they
price next spring’s futures at $155+.

I don’t doubt that fed cattle supplies will be tighter next year, but I
also a believer that demand will be a lot weaker next year than it
has been this year, particularly if a recession develops while the
Fed is trying to tame inflation. Next week, look for packers to
dial the kill up and that could result in another modest increase in
the cash market. It will be important to watch how the cutouts
react to growing kills over the next few weeks. They need to
move higher at a better clip than they did this week or traders are
going to turn pessimistic once again.