Beef Wraps

The cash cattle trade averaged $140.52 this week, up about $0.60 from
last week’s average. Packers bought rather large numbers this week
and so may be able to pull back from the spot market a bit next week.
This week’s market had to be a disappointment for cattle feeders after
last week’s $3 increase, but there seems to be a strong feeling in the
producer community that cash prices will continue to trend higher. The
Apr futures are priced close to $6 over this week’s cash and that
provides an incentive for cattle feeders to delay marketings if they don’t
like the price that packers offer. The problem with that is that carcass
weights are already very heavy and any marketing delay is just going to
add more weight and increase the chance that cattle feeders will have
to conduct a fire sale at some point in the future.

Steer weights should be trending lower seasonally at this time of year,
but instead, they jumped 3 pounds higher in this week’s data. That
pushed this week’s DTDS weights up to +20, which is a serious red flag
for feedyard currentness. The weather across cattle feeding country
was relatively mild this week and that will help the cattle to put back on
any weight that they might have lost in the previous week’s cold blast.
Some snow is forecast in the Plains late next week, but it doesn’t look
like it will be a major weather event. This week’s fed slaughter came in
at 507k, which was almost 20k more than the week before. That will
help to clear some of the cattle that were backlogged during the omicron
wave, but it will also produce a lot of beef that needs to be moved next
week. Cow and bull slaughter was 152k this week, which was over
10% stronger than last year. 90s prices are very strong and rising and
that is putting upward pressure on cull cow prices which, in turn,
encourages producers to send more marginal cows to slaughter. That
high cow slaughter rate is partly responsible for why futures traders are
so bullish on the deferred contracts. Breeding herd liquidation seems
to be moving along at a high rate and that causes traders to believe that
cattle and beef supplies are going to get very tight.

They are right about that, but I think that they are off on their timing. It
should take at least another year, and probably 2 years, before the herd
gets so small that it causes a supply crunch and sharply higher prices.
However, as long as lean beef prices hold at very high levels, it will
continue to encourage herd liquidation. This week the Choice cutout
fell $7.72 and the Select was down $7.57 on a weekly average basis.
All of the primals were lower, but the loin was definitely the weakest link.
Buyers backed away from top butts this week, with prices for the Choice
product down 8.6% Friday-to-Friday. Those top butts had been bid up
to very high levels in early January and they are now coming back down
quickly. End meat prices also moved lower, which is a little unusual for
this time of year. USDA released its retail beef prices for January this
week and those were down a little less than 1% from the prior month.
Retail prices are now slowly retreating, but still very high in a historical
context.

As consumers struggle with high gas prices and significant price
inflation in the other things that they buy, there will be less room in the
budget to pay up for beef. My sense is that consumers are now
“climbing back down” the protein ladder as stimulus windfalls are
depleted and inflation erodes any benefit they might have received from
higher wages. When the great demand bubble of 2021 started, you will
recall that pork demand started moving strongly higher in February of
2021, but beef demand didn’t really show any significant gain until
about 6-8 weeks later. Back then, consumers were climbing up the
protein ladder, first demanding more pork and then eventually
displaying increased demand for beef. Now they are going in the other
direction and it is manifesting as weaker beef demand first while pork
demand is improving. Eventually pork demand will ease too as more
consumers trade down to lower priced chicken. The combined margin
chart is clearly signaling a demand downcycle and the only real
question is how long it will last.

Fortunately for beef producers, spring is just around the corner and
when the calendar turns to March we should see some of the normal
grilling demand come back into the complex. However, I wouldn’t look
for this year’s spring demand to be as strong as it was last spring.
COVID infections are falling rapidly and there is a general sense in the
population that the pandemic is nearing an end. That means
consumers will be spending time this spring and summer catching up
on all of the travel and other things they couldn’t do during the
pandemic. As a result, they will probably spend less time hanging out
around their grill in the back yard. I see the cutouts working lower
through February and then turning higher in March as demand
improves. Right now, the forecast has the Choice cutout getting down
to about $265 before it makes the turn higher, but it could easily slide
below that level. International demand for US beef seems to be ok, but
not really growing like it was in the second half of 2022.

According to USDA, beef exports in December were up about 1% from
the previous year and for 2021 as a whole, beef exports posted an
impressive 16.6% gain. The last time annual exports grew by a greater
percentage was in 2011. The forecast has 2022 exports down 2.6%
from 2021, but that still be very strong export year from a historical
perspective. After big gains in the prior week, the futures market was
much more subdued this week, perhaps due to the near-flat cash trade.
There seems to be a lot of speculative money flowing into the long side
of cattle futures under the idea that price inflation will take cattle and
beef prices substantially higher this year. I think that is a mistake and
they are late coming to the party. The price inflation has already
happened and now beef prices and soon cattle prices, will be on the
defensive. Next week, watch carcass weights. They should come
down at least a couple of pounds, but if they don’t that will strengthen
the case that feedyards are still behind on their marketings.