Beef Wrap August 20
Beef prices continued to soar this week with the Choice cutout up
$27 from the end of last week and the Select cutout up over $22.
The chart below indicates that it is the middle meats that are now the
primary drivers of the price increases, with the end primals providing
much less of the lift. That gives me hope that the cutouts may be
nearing a top since if the end meats start to retreat, it will be hard for
the middles to continue to provide gains large enough to keep
pushing the cutout higher. However, as much as I’d like for next
week to be the top, I could easily see this rally extending 2-3 more
weeks. The chart below shows the rapid acceleration in the rib
primal over the past four weeks.
You might also notice that the current value for the rib primal is
above what I’m forecasting for holiday ribs. Who would think that
ribs would be more expensive in mid-August than they will be in
November? Probably no one. So, either this late summer rally is a
very unusual occurrence or I’m way too low on my middle meat
forecasts for the holidays. Actually, both may be true. I know the
first one is. Over the past 10 years, the rib primal has averaged
about $50 more in November than it has in August. If that happens
again this year the rib primal would be close to $590 in November.
That would be a 34% increase over last year, and last year was an
all-time record high for November. Talk about sticker shock for end
users. Time will tell if that happens this year, but buyers should tuck
the idea away in the back of their minds that the rib primal might
reach or exceed the $600 level this fall. In fact, that fear may partly
explain the current rally—buyers are afraid of low availability (due to
labor constraints in plants) and super high pricing this holiday
season so they are buying now and putting the product in a
suspended fresh programs.
Reports from retailers suggest that beef is moving out of the meat
case with little or no concern for price on the part of consumers.
That also sounds like a bit of panic going on. It is possible that
consumers are refilling their freezers out of fear that the delta variant
surge will force them into stay-at-home mode over the next few
months. When markets get frothy like this it is a good bet that there
is fear involved somewhere.
The cash cattle market even benefited somewhat from the rally in
beef this week as packers have been willing to pay more for high
quality cattle as they search for those animals that will make the
Choice grade and thus allow them to capitalize on an extremely
wide Choice-Select spread for this time of year. So far this week,
cash cattle pricing has averaged $126.52, up a little more than $3
from last week’s average. Packers are still having difficulty
ramping up the kill due to a lack of labor.
I calculate packer margins at $1043/head this week, which is
nearly identical to the peak in packer margins last spring. Maybe
that means we are near a top (?). The combined margin has now
exceeded the peak it made during the spring rally, which is a sign
that demand is now stronger than it was at the peak last spring.
When the market finally broke last spring, I thought that it might be
years before we saw demand that strong again and yet it only took
a few months to break that record. Cattle feeding margins this
week were -$90/head, so you can see why cattle feeders are
frustrated when they see packers making over $1000/head,
especially when you consider that a cattle feeder has to care for
that animal for six months in order to lose $90/head yet the packer
has that same animal for only a few days to make +$1000/head.
Life is obviously not fair. The weekly export data released this
morning looked solid for beef—especially movement to China.
We are rapidly approaching the point where China may import
more beef from the US than pork. There is another thing that I
though would never happen. What a strange year this has been.
Next week, watch the middle meats for signs that they are running
out of gas because once the cutouts top, they are likely to move
lower rapidly as buyers begin to back away. It is hard to tell exactly
when that will happen, but I would expect that a turn lower in the
middle meats would be an early indicator.