Beef Wrap December 17
The cash cattle market continued on its lower trajectory this week,
down a little over $2 to average $137.18. Packers appear to have
bought less cattle this week than last and only about half as many as
they bought during the week following Thanksgiving when prices
peaked at $140.50. The beef market also continued its march lower
with both cutouts losing about $5/cwt on a weekly average basis.
Toward the end of the week packers were bidding $136, but cattle
feeders seemed to lose interest in trading at that level, preferring
instead to carry cattle over into next week. I wouldn’t expect packer
interest to be any stronger next week than it was this week, given the
upcoming holiday-shortened kills. Further, it looks to me like cattle
feeders might be making a serious error by not moving as many cattle
as they can right away. Steer carcass weights were reported up 2
pounds this week and the preliminary data is pointing toward another
2-3 pound increase next week.
Mild weather across much of the US over the last couple of months
has fostered an environment where cattle gained weight rapidly. The
chart below indicates that steer weights are now above last year.
The de-trended and de-seasonalized carcass weights took a huge
jump this week and are now above the zero line and projected to
move even higher in coming weeks. For me, that is a flashing red
light that signals a shift in leverage back in the packer’s favor and I
don’t think he will hesitate to use it in order to push cattle prices lower
over the next few weeks. By limiting the number of cattle they sold
this week, cattle feeders could be setting themselves up for an even
bigger loss of currentness down the road. This week’s fed slaughter
tallied 508k, down about 10k from the week before and suggests that
the sense of urgency to kill cattle that packers were displaying in
November is no longer a factor. Next week, look for packers to do no
Saturday kill and a very small Friday. The fed kill may fail to reach
400k.
The same pattern will repeat in the week leading up to New Year’s,
but the Friday kill will likely be larger than during Christmas week and
thus the fed kill could be closer to 435k. While these small holiday
kills are taking place cattle will be enjoying warm weather in the Plains
states and continuing to pack on the pounds. There seems to be a
feeling among cattle feeders that the market might take a breather
through the holidays but then it will rally again in January. I’m not so
sure about that. A lot will depend on how much margin packers have
to work with. Margins this week were around $325/head, down $28/
head from the week before. An even bigger decline is projected next
week and that will leave packers in little mood to be generous. One
might think that the small holiday kills would boost beef prices, but
beef buyers are also on holiday and thus the need is less. It is
common for the cutouts to be steady-softer in the last two weeks of
December.
This week, once again, it was everything except briskets and 50s
pushing the cutout lower. The fundamental forecast has the Choice
cutout finishing the year in the $250-255 range. Ribs have declined a
bit less than I expected, but the damage is not fully complete there
just yet. End meats look to only have a little more downside risk and
should turn decidedly higher in January. Retailers tend to focus on
featuring the lower-value end cuts and grinds during January
because they realize that consumers will be burdened with holiday
bills. This year however, consumers appear to be in a better
financial position as a result of all the stimulus money that rained
down on them in 2021. Steak cutters normally watch middle meat
prices closely for a bottom in early January and then they swoop in
and buy product to prepare for spring. It seems to me that domestic
beef demand is continuing to leak lower, but international demand
remains very good.
Of course, the wild card is the omicron variant and if it causes
consumers to move back into stay-at-home mode and thus stockpile
meat again. Along those lines, omicron is also a concern for packing
plant workers since it seems to evade the vaccines readily. It may
not be as life-threatening as other variants, but it is more virulent and
thus could spread rapidly through packing plants causing high
absenteeism and even possibly causing some plants to close
temporarily for lack of labor. We have all seen that movie before—it
causes beef prices to rocket higher and cattle prices to tank. So far,
there hasn’t been much evidence of buyers stockpiling beef as a
hedge against such an event, but the potential is real and should be
on every buyer’s radar. For now though, the combined packer
+feeder margin continues to move lower and thus points to softening
demand. The turn higher might not come until mid-January unless
omicron causes problems that panic both beef buyers and
consumers. Futures traders are already beginning to sense the loss
of leverage by cattle feeders and the curve was down $1-2/cwt this
week.
If they start to believe that COVID is going to become a problem in
packing plants again, the downward reaction in the futures will be
swift. Next Thursday, USDA will issue a Cattle on Feed report. I’m
projecting it will show November placements up 7.3% and on-feed
inventories as of Dec 1 to be up 0.2% YOY. Futures traders would
likely view a placement number that large as negative to the spring
and summer contracts. Next week, watch for further weakness in
both the cattle and beef markets on light volume as market
participants begin to focus more on the reason for the season and
less on the typical course of business.
