Beef Wrap April 9
The cash cattle market moved sharply higher this week, with
average prices near $122, up nearly $4 from the week before.
There were even reports of some trade at $123. So, how does a
market go from being stuck at $114 for seven weeks to jumping $8
in the last three weeks? You can thank the astounding rise in beef
prices for that.
The Choice cutout gained over $19 this week and the Select added
over $17. It is true that beef availability was curtailed a bit last week
due to light kills around Easter, but the primary culprit of the sharp
rise in beef prices has been domestic demand. Last week, I said that
I had pushed my forecast for the spring top in the Choice cutout to
$275, but we almost made it there this week. The Choice closed
today at $272.17. Needless to say, I had to raise my forecasts again.
I am now looking for a top north of $290 and if I had to guess I’d say
its more likely that the top is higher than that rather than lower. The
Apr futures got out ahead of the increase in cash cattle and cattle
feeders hit the longs with a large number of delivery certificates, but
that didn’t phase Apr in the least—it just kept moving higher. Clearly
some cattle feeders were being too pessimistic. They probably
won’t make that mistake next week.
This week’s fed kill looks like it will be in the neighborhood of 508k,
almost 30k more than last week’s holiday-tempered kill. I estimate
that 508k was at least 20k more than what the available cattle supply
would support and so packers are now pulling harder on the
available supply. Given that their margin clocked in at $553/head
this week, it is easy to see why they want to kill as many as they can
get their hands on. But they now have a problem—the very light
feedyard placements from last fall. Supplies are tightening right at
the time when demand is surging.
Packers will continue to try to pull cattle forward, but they will have to
pay up to make that happen. If there were any lingering backlogged
cattle from the February cold snap, they are probably gone now.
Carcass weights also suggest a strong pull on the cattle supply. The
comprehensive report showed a 10 pound drop in carcass weights
last week, and that was a short kill week. That drop will show up in
the FI carcass weights next Thursday. Cattle feeder leverage
should be increasing by the day. It has been a really long time since
we saw a $4 one-week jump in the cattle market and I guess many
observers thought that it would never happen again. But, under the
right circumstances, and we have those now, cash cattle prices can
move higher in big chunks.
I think it is very likely that cash cattle move over $130 in May and
perhaps even over $135. Think about this: the packer breakeven,
which is the price they could afford to pay for cattle and just barely
breakeven with today’s cutouts is $162.50. If cash cattle went
straight to $135 next week they would still have almost $30/cwt
profit ($420/head) in every animal they kill. All of this is being driven
by phenomenal demand.
I’ve talked about how the current demand environment reminded
me of the Atkins Diet craze in the early 2000s. I am taking that
explanation more seriously now. Something powerful is going on in
the demand side of all the animal proteins. It’s not exports. Look at
what has happened in pork. The cutout there has been over $90 for
six weeks and is still moving higher ($113 today). That is not
normal. I think whatever got into pork is now into beef. Does
anyone really think that the beef cutouts are going to turn around
next week and lose the $20 they put on this week? No, of course
not. It hasn’t played out that way in pork and is unlikely to play out
like that in beef. More likely, beef keeps grinding higher for weeks
on end.
Retailers are notoriously slow in raising retail meat prices so the
consumer is not seeing retail prices that equate to a $270 Choice
cutout. Retail pricing is probably more in line with at $230 cutout.
As a result, consumers will continue to snap up the beef until
retailers can raise the prices that consumers face to a level that is
more reflective of the current cutouts. When consumers snap up
beef rapidly, that sends the poor retailer back into the wholesale
market to restock, further driving up the cutout.
Another serious positive for beef demand is the calendar. This is
the time of year when warming weather boosts grilling demand.
That is just barely getting started now, but will accelerate from now
until the end of May. So, clearly I am now wildly bullish. How could
one not be? I think pork holds the blueprint for beef. Look at what
has happened there. The price of hogs has not remained stagnant,
but rather has increased right alongside the cutout until now they
are over $100. It doesn’t make sense to expect cattle to remain
stagnant while the beef cutouts move higher, especially given that
placements last fall were so light. Next week, watch the cutouts. If
they work even higher, that is an ominous sign that this rally is just
getting started.
