Beef Wrap December 24
The cash cattle market declined again this week, dropping about
$1.50 to average $135.55. The cutouts stabilized, with the Choice
nearly unchanged on a weekly average basis and the Select up about
$2. That allowed packer margins to increase modestly, now at $377/
head. Analysts are watching the COVID situation closely in the US
as the virus seems to be spreading rapidly right in the midst of the
biggest travel season that has occurred in over 2 years. It seems
almost a given that infections are going to spike in the next 2-3 weeks
to levels we have never seen before. That spells trouble for the 40%
of the population that is unvaccinated. The important question for
meat demand is how will society react? Already we are seeing
important sporting events like football bowl games being cancelled
because one or both teams has so many COVID infections that they
can’t field a team.
Restaurants are cautiously eyeing this trend and my guess is that a
lot of them will be forced to close over the next few weeks. That could
result in a surge in retail meat demand yet there is no indication that
retailers are ramping up purchases in order to prepare for such an
event. That is probably because we were headed into Christmas
week and everyone figured it could be dealt with after the holiday.
That makes me nervous that we are going to see aggressive buying
in the next couple of weeks just when the supply chain is rather bare
because of holiday-reduced kills. Of course, we could see an
offsetting decline in purchases from the foodservice sector, but that
might lag the retail surge by a few weeks. The other thing that needs
to be considered is the impact of rapidly rising COVID infections on
harvest operations. Most of the major packers have been requiring
employee vaccination for some time and my guess is that they will
aggressively step-up their booster programs since it seems that
having the booster is the key to not getting infected with the omicron
variant. They also have pretty solid routine testing procedures in
place so they are likely to catch most COVID infections before they
are spread among co-workers.
Still, a lot of plant workers are likely to get infected visiting with family
and friends over the holidays and that would cause them to need to
be quarantined for a few days. So we might see a situation where
plants are able to operate, but at a reduced capacity. We already
know from previous experience that when plants can’t run at normal
rates, it is positive for beef prices and negative for cattle prices.
Unfortunately for cattle producers, feedyard supplies are quickly
rebuilding after the Oct-Dec “hole” that was created by small
placements back in late spring and early summer. Cattle
performance has been excellent also. Carcass weights are currently
near all-time highs. So there is little room for cattle feeders to absorb
a slowdown in kills without a lot of cattle becoming excessively heavy.
My sense is that the supply side would backlog rather quickly. The
strong cattle performance is being driven by exceptionally mild
weather in the Plains States. There have been very few snow events
in cattle country so far this year. The chart below indicates that
carcass weights are now above the very heavy levels registered in
2020 when cattle got severely backlogged due to plant closures. The
DTDS weights are also well into positive territory now and moving
quickly higher. I have seen very little concern among industry
participants about cattle weights and it makes me think that the
industry is going to get blindsided by this in January. COVID-related
plant slowdowns would just accelerate this brewing problem. Packers
will likely do a very light kill on Friday and zero on Saturday to
produce a weekly fed kill in the 380-390k range.
Next week, I see the Friday kill being bigger, but still way down from
normal and thus rendering a fed kill in the 410-420k range. So the
beef pipeline will be temporarily tight on product. Let’s hope retailers
don’t rush in when they see the COVID cases rocketing higher.
Futures traders seem oblivious to all of this as the most-active Feb
contract gained over $3 this week. There seems to be a sense in the
futures community that the cash cattle market is going to turn higher
next week as packers need to rebuild inventory for a full kill in the first
week of January. However, packers will have access to all of their
January contract cattle as soon as the calendar ticks over to 2022 and
that might allow them to be less aggressive than futures traders think,
particularly if they see rising COVID cases in their workforce and
realize that they won’t be able to run full-out in early January. On
Monday, the first order of business will be to react to Thursday’s
Cattle on Feed report. That report pegged November placements up
3.6%, which was very close to the average trade guess. That left the
Dec 1 on-feed inventory only a hair below where it was last year.
Traders will probably quickly shrug off the report and begin to focus
on the COVID situation and what it portends for the cash market in
January.
The beef market will soon be shifting out of holiday mode and into
winter mode where end meats and grinds will be carrying most of the
load in the cutout. We have already started to see that this week
where softness in the ribs was offset by strength in the chucks and
rounds. The 50s market could come under some supply side
pressure once kills get back to normal since very heavy cattle will
throw off a lot of fat trim. If retailers rush into the market out of
COVID fears, look for them to target the end meats first. Next week,
watch the news closely for rapidly escalating COVID infections and
the public’s reaction to them. In my opinion, that will be the most
important story for the next few weeks.
