Beef Wrap February 25
Cash cattle markets averaged about $1 higher this week, but there
was a wide range of prices reported. Early in the week, some
packers stepped up and paid as much as $145 for cash cattle, with
more sold at $144. Then following the news of Russia’s invasion of
Ukraine, the futures market fell hard and that prompted some cattle
feeders to accept $142 for their cattle. In the end, the average was
$143.40 and packers bought fewer animals than the week before.
However, on Tuesday packers will get access to their March formula
cattle, so perhaps it wasn’t a priority for them to buy a lot this week.
Meanwhile, the beef market just kept sliding lower. The Choice
cutout lost over $9 on a weekly average basis and the Select was
down over $7. Many observers had pegged the $260 level on the
Choice cutout as forecasted bottom for this demand cycle. However,
this afternoon the Choice cutout printed $258.
That is causing some analysts to revise their forecasts lower, myself
included, but I’ve always thought that the risk was to the downside in
this situation. February is an awful month for beef demand and if I’m
right about consumers trading down from the super-high beef prices
that they are seeing in grocery stores, then there could still be some
price erosion before the bottom is in. Next week marks the beginning
of Lent and that won’t help beef demand either. Last week, I wrote a
lot about watching the brisket primal as a proxy for consumers
moving back to a post-pandemic lifestyle that likely means softer beef
demand that what we’ve experienced for the past year. Well, the
Choice brisket primal lost $21 over the course of this week. I don’t
think that bodes well for beef demand going forward. The combined
margin is now below all of the bottoms that it made since the “great
demand bubble of 2021” started early last year. And yet, the
combined margin is still very high in a historical context so there is
plenty of room for it to move lower.
The packer part of that combined margin fell to $270/head this week,
a level that it hasn’t visited in over a year. Further, if my forecasts for
next week’s cutout are close, the next packer margin will fall below
$200/head. At some point here soon, packers are going to
vehemently resist paying more for cash cattle in the face of falling
cutouts. The futures market seemed to sense that this week and we
saw a big sell-off in the front end of the futures curve. The
uncertainty created by the situation in Ukraine also created a risk-off
environment that led to selling pressure. The Apr contract finished
the week just below $142 and that is important because now Apr is
below the current cash market. For a long time prior to this week,
Apr was above cash and helping to lead it higher. Now the basis has
shifted and the market is telling cattle feeders that the longer they
hold cattle the less they will be worth.
There is already a feeling that cattle in the feedyards are not very
current, so this shift in the futures could make cattle feeders more
willing sellers as we move forward. Speaking of currentness, this
week’s weight data showed a whopping 12 pound decline in steer
carcass weights. That was a huge surprise, but it really just brings
weights back down to where they are almost even with last year and
last year’s weights were quite heavy. The DTDS weights are still
very elevated. There was a pretty severe cold front that moved
across cattle country this week and that may help keep weights on
the defensive, but I still think that weights will remain above last year
for at least a couple of months. The forecast for next week is warm
and mild across the midsection of the country. This week’s fed
slaughter registered 500k, down 12k from the week before. I have a
similar size kill forecasted for next week. With demand somewhat
precarious, I doubt that packers will get very aggressive with the kill.
As we move into March, the fed kill could expand a bit, perhaps into
the 510-515k per week range. Non-fed slaughter was unchanged
from the week before at 148k. So, the supply side of the market is
fairly well behaved and I wouldn’t expect any big surprises in the next
few weeks. USDA did give us a Cold Storage report this week which
showed beef stocks as of the end of January up 1.4% from last year.
That was the largest January cold storage inventory since 2017, so
end users have more of a buffer in place if spot beef prices should
start to rise. Most of the increase was in cuts, not boneless product,
and that might indicate that users like steak cutters were socking
away product during January in anticipation of the spring market. As
we move into next week, the situation in Ukraine will be top of mind
for both cash and futures market participants.
Prices for a number of commodities including crude oil shot higher
on the news of the invasion and cattle/beef traders will be working to
determine how these changes will affect consumer behavior. It looks
almost certain that gasoline prices will rise as a result of this event,
and they were already very high. That will just put more stress on
consumer budgets and leave less room for consumers pay the
extremely high beef prices that grocery stores are asking. It also
stokes fears of overall inflation in the economy, which won’t be good
for beef demand either. We can expect the stock market to be on
edge also and any big declines there won’t do any favors for beef
demand. There is not much about this new war that is going to be
positive for beef prices. Next week, watch everything—equities,
crude oil, news updates from Ukraine, brisket prices, cutouts and the
weight data. It is all going to have a bearing on the direction of cattle
and beef markets over the next few weeks.
