Beef Wraps

The cash cattle market moved a little lower this week, but for all
practical purposes it remains stuck in the $138-139 range it has been in
since early March. The cutouts continued higher, but at a little slower
pace than expected. The Choice cutout added $4.41 on a weekly
average basis and the Select cutout was up $2.74. Packer margins are
slowly working higher and I calculate this week’s margin at $326/head,
up $30 from last week. This appears to be a pattern that is going to be
with us for the next few weeks at least—cutouts moving higher, cash
cattle holding steady and packer margins growing. With feedyards full
of heavy cattle, cattle feeders have little leverage to push cash cattle
prices higher. In fact, this week, the cattle trade started on a Monday
and that is a sign that cattle feeders felt fortunate to get steady money.
As long as their margins are moving upward, I don’t expect packers to
pressure the cash cattle market. Now, what happens if the cutouts
should turn lower and start to compress packer margins?

Most observers would think that is an unlikely scenario and I’m among
them, but it is not outside the realm of possibility. I suspect that if the
cutouts and margins turn lower that packers would be pretty quick to
pressure the cash cattle market. They feel entitled to very good
margins during the spring season and will seek to make that happen
however they can. I have to admit that the gains in the cutout recently
haven’t been all that impressive. I’m finding that more often than not, I
have to lower forecasts each week because the market is just not living
up to expectations. Now, that could change, of course, and the big
hump on the horizon that the market needs to clear is the Easter
holiday next weekend. It could be that retailers are just full up with
hams and turkeys for Easter promotions that they just don’t have room
for a lot of extra beef at the moment. It is possible that once we get
past Easter, the beef orders will pick up substantially. On the other
hand, the softer-than-expected interest in beef could have more to do
with extremely high retail beef prices and a consumer that is seeing his
budget stretched by price inflation on almost everything he buys.

If we don’t see stronger beef pricing immediately following the Easter
holiday, I’m going to lean toward the second explanation and that
would be a real negative for prices over the next few months. There
are a lot of cattle that will need to be processed between late April and
early August and if consumer demand for beef is struggling, then lower
prices will be required to help clear all of the beef that will need to move
through the domestic market. I have been saying for some time now
that consumer demand for beef is very likely to revert to more-normal
levels this year after a host of factors, including massive government
payments direct to consumers, gave us the best beef demand ever
recorded. The quarterly demand index chart below provides an idea of
how I see this playing out in 2022. First, notice how strong the
demand indexes were in 2021 (blue bars), relative to the five-year
average (yellow bars). Last year’s demand surge really got going
good in Q2 and demand peaked in Q3 (remember August?).

Then demand moved a tiny bit lower in Q4 and lower yet again in Q1 of
this year (green bars). The shaded green bars report the demand
index that is impounded in my beef price forecasts for the rest of the
year. I have it continuing to work lower in Q2 and Q3, with a slight
uptick in Q4. If we realize those demand levels, they would still be way
stronger than normal, but significantly below the 2021 super event. My
working theory is that the 2021 demand bubble was caused by external
events (pandemic, stimulus) and the further away we move from those
things, the more demand is going to revert back toward the longer-run
average. Time will tell. On the supply side, packers put together a
very large fed kill this week at 525k. That was 39,000 head more than
the week before and probably reflects packers’ desire to build some
inventory ahead of a lighter kill next week due to the Good Friday/
Easter events. Even so, it creates a big supply of beef that will be
looking for a home next week when retailers’ attention will still be
focused on hams and turkey.

It will be interesting to see how wholesale pricing holds up. Steer
carcass weights were reported down six pounds this week and that big
decline was much needed. However, it didn’t really affect the DTDS
weights very much and there are indications that next week’s weight
data will show a much smaller decline. So, heavy carcass weights are
still a problem in my mind. It does look like cattle country might get a
heavy dose of precipitation next week and that could muddy up the
feedyards and result in some faster weight loss. USDA reported the
official export tally for February this week and it showed a 1.6% YOY
increase. That was a good bit less than what I was looking for, but still
the second strongest February on record. More importantly, beef
imports were reported up 41% YOY and thus imports exceeded
exports by 25 million pounds during February. Both Brazil and Mexico
are finding very advantageous to sell beef into the US market.
However, Brazil has now reached its tariff rate quota and that means
that we will probably see a lot less beef shipped from that source as we
get deeper into the year.

Bottom line, the US market appears to be well supplied at the moment
and the supply side only gets more bearish as we move into May and
June, when weekly fed kills above 525k could become commonplace.
Cattle feeders are frustrated that they can’t advance cash cattle prices
and appear to have dramatically slashed placements during March in
response. It is likely they will limit April placements also. That has the
potential to create some tightness in the beef supply, but not until
September and beyond. Between now and then, buyers should find
beef availability to be quite good. Next week, it is likely to be more of
the same—stagnant cattle prices and slowly rising beef prices. Watch
the pace of the cutout increase next week for a clue as to how strong
the post-Easter business might be.