Beef Wrap February 18
It was another week where cash cattle prices moved up and cutout
values moved lower. Packers came out bidding $142 rather early in
the week and they managed to get the showlists bought for an average
price of $142.25, which is a little less than $2 over last week’s average.
The Choice cutout dropped $6.43 on a weekly average basis and the
Select cutout was down $5.52. That further compressed packer
margins, which are now estimated at $360/head. Just three weeks ago,
those margins were at $575/head. February normally sees some of the
tightest packing margins of the year due to soft consumer demand and
seasonally small fed cattle supplies. Prior to 2019, packers would
routinely lose about $50-100/head during February, but since then,
February margins have been solidly positive. It is pretty clear that
overall beef demand is in a downcycle and the combined margin chart
confirms this.
The most important question is when will this downcycle stop? Looking
at the combined margin chart, we see that it is approaching the area
where it bottomed in the last cycle and it could bottom there this time
too, but if demand really is on its way back to “normal” now that COVID
has receded, then it would seem like the bottom might be a lot lower
than where it is now. My current theory is that consumers are moving
beyond the pandemic and getting back to their normal routines. That
means cooking food at home is less of a focus than it was during the
pandemic and super-high beef prices in the grocery store just make it
even easier to pass up. I think consumers are in the process of trading
down from beef to pork and that is why we have the beef cutouts falling
like a rock, but the pork cutout moving higher. One item that I have
been watching closely as a “return to normal” indicator is briskets.
During the pandemic, there was a surge in demand for smoking grills as
consumers sought to entertain themselves at home. And of course,
briskets are a common choice for smokers. The attached chart shows
the value of the brisket primal from 2018 to present. Prior to the spring
of 2021, the brisket primal had stayed mostly between $150-200/cwt.
Brisket demand really started heating up in March last year and we
have seen a lot of prices in the $250-300 range over the past nine
months. Now, brisket prices are falling fast. There have been a
couple of other downdrafts in the brisket price that eventually reversed,
so I don’t want to be too quick to say that this is going to be the one that
bottoms back in the pre-pandemic range. And, this downdraft could
just be a normal February lull in demand. After all, it is pretty cold
outside to be running a smoker. But it was pretty cold in December too
when the brisket primal approached $300/cwt. It is still early, but we
should keep an eye on the brisket as a leading indicator that beef
demand is heading back to pre-pandemic levels. It seems that many
market participants are expecting the Choice cutout to bottom soon and
my forecast is among them, but there is a very real risk that the cutout
continues to slide right on past $260 on its way to a bottom at a much
lower level.
That would likely shock the market and would almost certainly quash
the bullish enthusiasm that has been present in the futures for months
now. Remember, in the years just prior to the pandemic the Choice
cutout averaged around $220 in March. It probably wouldn’t get that
low now because there has been a lot of cost inflation since the
2017-2019 years, but $240 wouldn’t be out of the question. I definitely
think that the risk to my $275 March Choice cutout forecast is to the
downside and recognize that it could be way south of what I currently
have dialed in. In contrast to all of the uncertainty surrounding the
demand side of the market, the supply side seems pretty well behaved.
This week’s fed kill came in at 512k, up 2k from the week before and a
good bit larger than what past placements indicated for February.
Perhaps packers are cleaning up some of the cattle that were
backlogged during the Omicron wave. They need to do something,
because the cattle are getting excessively heavy.
Steer carcass weights were reported up 3 pounds this week to 930
pounds, which was one pound heavier than the peak that was
registered back in early December. The normal seasonal pattern is for
carcass weights to trend lower from November to April, so this is highly
unusual. Further, the DTDS weights have moved to a very high level.
That seems to suggest that feedyards are not current at present.
However, that doesn’t seem to have affected feedyard’s negotiating
position with packers since cash prices have been working higher over
the past couple of months. One thing is for sure: bigger-than-expected
kills and very heavy carcass weights will result in a lot of beef tonnage
that needs to clear the market next week. That is generally not helpful
when demand is in a downcycle. International demand seems to be in
decent shape, but it isn’t stellar enough to save the market from a
domestic consumer that is shying away from high retail beef prices and
has other things to do now that the pandemic is winding down.
Even the futures market seems to now be having its doubts. Traders
have been flattening out the futures curve recently. This week the
nearby Feb contract was up the most as it kept pace with the rising
cash market, but the deferreds were up less. It is entirely possible that
at some point in the near future a basis shift happens and causes the
futures curve to invert. I think that is likely to happen the first time cash
trades solidly lower from the week before. Large speculators have built
a pretty sizable long position in live cattle futures under the hope that
persistent inflation will cause cattle prices to continue to rise, but if the
curve shows signs of inversion, they may head quickly for the exits and
remove a lot of what has been supporting futures lately. Next week,
watch the cutout values to see how well the market digests this week’s
large production and keep an eye on those brisket prices—they might be
trying to tell us something.
