Beef Wraps

The weekly average of cash cattle traded live this week was $121.93,
just a hair under the $122.01 posted last week. The dressed trade
came in at $195.63, slightly above last week’s average of $195.30. So
it is safe to say the cash cattle market was essentially flat this week,
but boy it sure didn’t feel like it. The futures board was down hard and
that seemed to suck all of the life out of the cash market. The cutouts
continued to move higher this week, with the Choice up over $7 and
the Select gaining more than $10.

With such a robust beef trade this week, one would have thought that
the futures market would have been a little more optimistic. But the
story was essentially the same in the pork market, where the
fundamentals held solid yet the futures sold off in a big way. It is
almost as though futures traders suddenly “lost faith in the future.”
Just last week they were buying both cattle and hogs like there was no
end in sight, but this week their psychology turned. I think that the
hog market meltdown helped exacerbate the softness in the cattle
market. A big part of the bull story in cattle has been the idea that pork
is going to be very expensive this summer. That story took a hit when
the hog futures started to move lower. The new sales numbers in the
weekly export report looked a little light this week for both beef and
pork, but that should have been expected given how pricey both have
become. Cargill had some software problems at its Dodge City plant
that caused them to do lighter kills than normal and perhaps that
spooked futures traders. That plant should be back to full speed on
Monday.

Now that the Jun futures are no longer premium to the spot market, it
reduces cattle feeder incentive to hold out for higher prices in the
future, particularly if the cattle are hedged. With the cutouts rising and
the cash cattle market remaining essentially flat this week, packer
margins moved up to $530/hd. The fed kill looks like it will come in
around 497k, down almost 20k from the week before. That looks to be
just a tad bit over what the flow model would suggest for this week.
Packers may want to increase the kill next week to capitalize on strong
margins, but they will need to be careful of running their inventories
too low and thus giving feeders an opportunity to advance the cash
market. Cattle supplies are tight in the North and packers are buying
cattle in TX and KS and trucking them to northern plants. The market
should be moving solidly into the hole created by light placements last
fall and should give cattle feeders some leverage. Futures traders
may think that the top in the cash cattle market has been made, but I
can guarantee that cattle feeders don’t see it that way. The truth will
be exposed by the demand side of the market.

If demand continues to run super strong, then that could move the
Choice cutout to nearly $300 before all is said and done and I would
be very surprised if the cutout reaches that level and the cash cattle
market remains unchanged. The combined margin advanced again
this week, but at a much slower pace than in recent weeks. Once
again, it looks like it is making a top, but it did the same thing a few
weeks back and then continued higher, so I’m not quite ready to call
this a top in the demand cycle. Beef 50s finished the week over
$100, which seems pretty bullish to me. Carcass weights moved a
little lower but are poised to rise next week and that is a bit
concerning. However, the price of 50s doesn’t make it seem like
cattle are carrying an abundance of fat. Packers will be needing to
deliver on a large amount of forward-promised beef in the next few
weeks (chart to the right) and in my experience, that is a very important
factor in forcing packers to pay higher money for cattle. Feeders
know this and will likely try to capitalize on in the next few weeks. It
is pretty clear to everyone now that the spring market for beef is
going to be very good. An important question is what happens after
Memorial Day.

With the Jun futures selling off this week and moving discount to
Apr, traders seem to be saying that beef demand is going to wane
as we move into June. That might happen, but all I can say is that
we haven’t seen much waning of either beef or pork demand in the
past few months, so this doesn’t seem like a normal demand cycle
that fades every couple of months. Now of course, kills will be
expanding in June and that could pressure the beef market after
Memorial Day. The bar chart to the right shows the historical demand
indexes by month for the past year and what I’m assuming for
demand over the next few months. Note that Apr is looking like the
strongest demand month since the plant shutdowns in May 2020.

Demand has been steadily increasing since January. I’ve got May
demand toned way down because if I didn’t the tight supply would
force my price forecasts off the chart. But, the decline in demand
from Apr to Jun to Jul to Aug is apparent. So, I’m not expecting the
current demand strength to last forever. Next week we will get a
COF report and it is likely to show a huge YOY increase in
placements, simply because of the sharp reduction in March
placements last year when COVID broke. Still, there is a risk that
the computers trading the market will see a 30%+ increase and
placements and go into selling mode.