Beef Wrap August 13
Cash cattle averaged about a dollar lower in the live markets this
week at $122.84. The dressed markets, which are primarily in the
north, were about $2 higher. Beef markets continued to soar with
the Choice adding almost $23 on a weekly average basis and the
Select adding a little over $18. At this rate, it won’t be long before
the beef market eclipses the high that was set back in early June.
What in the world is going on with this beef market? It is hard to say
for sure, but I would bet that it has something to do with the
resurgence of COVID infections in the US. That is the only thing that
has really changed since the beef market bottomed earlier this
summer.
We already know that stay-at-home behavior is positive for beef
demand and with infections rising, more people are probably back in
stay-at-home mode. We also had the Child Tax Credit stimulus,
which was paid out for the second time today. Those monthly
checks that range from $250-300 per child are going right into the
bank accounts of some of the poorest Americans. They naturally
want to upgrade their diet. Finally, there may be a certain amount of
quiet stockpiling going on by consumers. People who thought the
pandemic was coming to an end earlier this summer may have
worked down their freezer stocks of meat and now that the
pandemic is back on full-bore, they are restocking. Further, people
also stockpile when they sense that inflation is rising. Buy it now, or
pay more for it later. Inflation measures have certainly been strong
recently. The chart below indicates that all of the primals except
briskets and 50s were major drivers of this week’s cutout gains.
And, briskets and 50s are not really cheap either. Whenever I see
broad-based move like that in the cutout, it suggest that the demand
curve for all beef has moved outward. Stockpiling would do that.
Stimulus money would also do that.
I’ve notice that in my local retail circular there is much less meat on
feature and the price levels are not all that attractive. USDA
released their retail beef price data for July this week and it showed
retail prices were about 6.5 cents per pound higher than the record
set in June. My guess is that August retail prices will be even higher
than July’s. It feels a lot like an inflationary spiral is in place. The
combined margin chart shows that the second wave of super strong
demand is in place and could easily outperform the previous top with
a few weeks. I’ve also included the price-quantity scatter diagram
for August below. The thing to note here (besides how high the
2021 data point is from the line) is how small per-capita domestic
availability is.
It is on the order of what we saw back in 2014 and 2015. That is
being caused by small fed kills as labor problems keep packers
from processing normal levels of cattle. So, there is a supply side
component to this rally as well. Now look at the second scatter
diagram below which plots the cash cattle price against the same
per-capita consumption variable. Back in 2014-15 when beef
supplies got really tight, cash cattle prices were up around $155
because there were no bottlenecks in the system and packers had
to compete vigorously for cattle.
The difference between then and now is that back then there was a
real shortage of cattle and plenty of processing capacity. In 2021,
we have plenty of cattle and a shortage of processing capacity. As
long as that persists, I think we can expect cash cattle to trade in
the $120-125 range, regardless of what the beef market does. I
calculate packer margins this week at $858/head and poised to go
well over $900/head next week. Tyson’s stock surged almost 15%
this week when they reported on and extremely profitable quarter.
Anyone who was paying attention to the meat markets should have
seen that coming. The next quarter will likely also be profit
blockbuster for meat companies. This week’s fed kill only
registered 505k, which is below what the flow model suggests
should be available during August. That said, the weight indicators
do not suggest that cattle are backing up in feedyards to any
significant degree. Steer carcass weights actually declined 3
pounds this week when the normal seasonal would have them
increasing. The DTDS weights also suggest that cattle are not
overly heavy at the moment. The futures were largely unchanged
on the week, except for nearby Aug, which lost almost $2 Friday-toFriday. The Aug contract has had to contend with a slew of
deliveries as cattle feeders in the South attempt to score a better
price for their animals than what the packers are offering in that
region.
Ultimately, I’m looking for cash cattle prices to decline this fall, but
in order for that to happen, beef prices will need to cool off a lot.
For now, traders will be best served to delineate the trading range,
sell when prices near the top of the range and buy when they near
the lower end. Next week, watch those cutouts. Will they gain
more next week than they did this week? I’m not forecasting that
by any means, but it really wouldn’t surprise me if this strength in
the beef market continues unabated.
