Beef Wrap January 12
Weather was arguably the biggest factor to affect the cattle and beef complex this week. Snowstorms rolled across the Plains, hindering movement of cattle to slaughter and forcing packers to cancel shifts at several plants. That bout of snow will be followed this weekend by plunging temperatures as a polar vortex descends into the midsection of the country. Fed slaughter this week was estimated to be only 414k, which is about 25k less than what was slaughtered during the holiday week that contained New Year’s Day. So, the end result is that the industry has now dealt with three short kill weeks in a row. Beef buyers needing product are having to pay up as availability is constrained. The Choice cutout added $4.58 to average $283.44 on the week while the Select cutout was up $7.17 to average $266.18. There isn’t much good about weather events such as this, but there is a silver lining in it for packers. The sharply reduced kill is helping them to wiggle out of the very bad margin situation that they found themselves in during the latter weeks of December. Beef prices moved up and cattle prices moved down. As a result, packer margins next week could be only -$50/head, up from -$150/head in the week following Christmas. Before the weather developed, the light, early-week cash cattle trade in the north was mostly $175, steady with the week before. However, the late-week trade in the south looks like it was mostly at $172, which would be down $1 from the previous week. When all of the numbers are tallied on Monday, I look for the 5-area average to be close to $173.20, down about $1 from the week before. In weather situations like this, it is often unclear which direction the cattle price will go because on one hand there is risk of significant weight loss and death loss on cattle standing in the feedyards that could be price-positive for cash cattle, but on the other hand the sharply reduced kills run the risk of backlogging cattle, which would be price-negative. In this particular instance, this was the first real severe weather event and carcass weights have been running heavy, so the impact on feedyard performance likely won’t be as serious as it would have been if there had been several other weather events preceding this one. Further, packers have battled margin problems since September, causing them to slow kills. That chipped away at feedyard currentness and so the prospect of yet another short kill week probably made many feedyard operators want to move cattle even if they had to accept a lower price. Cattle feeding margins have moved further into negative territory over the past few weeks—a consequence of the very high prices that were paid for feeder cattle in late summer—and this week’s price decline puts them a little over $100/head in the red. We are now in a situation where both packers and feeders have negative margins and thus the combined margin is still trending lower. That is an indication that there isn’t enough margin in the system to cover the cost of production. If demand were stronger, perhaps that wouldn’t be the case. The combined margin may very well turn higher next week should beef buyers bid up the cutout as they fight over limited product. Technically, that type of activity reflects improving demand, but I consider it to be somewhat “artificial demand” because it arose due to buyers being caught out of position when a random weather event hit. That is different than the organic demand growth that manifests because consumers have an increased desire to purchase the product, and it is usually transitory. The polar vortex will also affect beef consumption as consumers caught in its path are likely to hunker down at home and so foodservice demand is likely to take a hit in the short run. This week, the cutout was supported by gains in the prices of end meats and trims, which are the items most in demand during the post-holiday period. Middle meat prices continued lower. It looks like these weather conditions are going to linger for a few days, so we might expect reduced kills early next week and some further gains in the cutouts. Once the weather warms back up and production returns to normal, I wouldn’t be surprised to see the cutouts give back at least a portion of what they gained. Retail beef prices during December were reported down almost 4 cents per pound from November, which is a step in the right direction for making beef a little more affordable for consumers. Still, retail beef prices finished 2023 about 9.5% higher than they were at the end of 2022, so there is still a lot of work to be done. Steer carcass weights were reported down one pound, but they were a whopping 26 pounds heavier than the previous year. This weather event will likely help to bring carcass weights down to more palatable levels, assuming that cattle don’t get significantly backlogged due to light kills. Next week, keep an eye on the weather and the daily kills since that will be the main feature in the market early next week. Expect the cutouts to gain a little more early in the week, but they could start to give some back by the time Friday rolls around.