Beef Wrap January 21
The cash cattle market averaged $137.39 this week, up about $0.78
from last week’s average. Packers bought more this week than
they did last week, so perhaps that signals growing confidence that
they will have enough labor to move kills higher next week. Both
cutouts gained about $10/cwt this week, but by Friday they were
showing signs of topping. We are now beyond the peak in omicron
infections here in the US and next week will likely see pretty sharp
declines in the infection count. That should take some of the
pressure off of the supply chain and also reduce any stockpiling by
consumers. It is likely that retailers stockpiled also as omicron was
rising, so they may have less need to be in the spot market next
week and that would provide some room for the cutouts to retrace a
bit. Beef supplies should be bigger also, as this week’s fed kill
came in at 491k, up 20k from the week before.
Some cattle likely got backed up over the last few weeks and
packers may step up next week’s kill a little to help clear that
backlog. Of course, cattle feeders aren’t likely to have much
leverage as long as a cattle backlog exists. Packers will probably
pay steady money since their margins are so strong right now, but if
they really wanted to, I’d bet they could push cash lower. Today’s
bearish COF report will probably generate some red ink in the
futures early next week and that will just give more ammo to
packers in the cash market negotiations. Carcass weights held firm
at a high level this week and we saw the DTDS weights shoot
higher, now at +10 lbs. That also reduces cattle feeders’ leverage.
So there are a lot of factors right now that are aligning against cattle
producers.
As expected, this omicron wave brought with it some improved beef
demand as consumers hunkered down once again. However, now
that the wave has crested, people will soon feel more comfortable
doing things outside of the home and that generally leads to softer
demand. The combined margin made a nice move higher this
week, but I really don’t think it is going to peak over $900/head the
way it did in the last two supercycles. In fact, we could see it turn
lower again next week if the cutouts struggle. Corn futures were
higher all five days this week and thus grain is very pricey at the
moment. That will put more hurt onto cattle feeding margins if it
persists. I estimate that cattle feeders were about $100/head in the
red this week and it would take cash cattle at $145 for them to
breakeven.
That’s unlikely to happen anytime soon. Export business has been
a little slow to restart following the holidays, but I think it will pick up
in the next few weeks. China still has a very strong appetite for US
beef. The chart below plots the demand index for the blended
cutout and it’s clear that beef demand has been softening since its
peak in November. Outside of the strong index I’m showing for
March (which may be too optimistic), I think the longer-term trend in
domestic demand is lower. Cattle and beef prices are somewhat
sensitive to movements in the equity markets and this week has
been a bloodbath for stocks.
The deferred futures have been very over-priced relative to my
fundamental forecast and that is probably because I see demand
fading back to more normal levels as the year progresses, but
futures traders seem to want to project the current demand strength
right through the balance of the year. They may also be expecting
cattle supplies to tighten up more than I’m forecasting, but there is a
good chance that today’s COF report, which showed December
placements up 6.5% YOY, will temper that thinking somewhat.
Packer margins increased $120/head this week to $574. Next week
could easily bring $600/head margins. I don’t see them getting
much larger than that, but rather slowly shrinking throughout
February, which is typically a poor demand month. At the end of
January, we will get USDA’s annual cattle inventory report
I think it will show the cow herd down about 500k from last year and
the total inventory about 1.1 million below last year. It doesn’t
appear that producers are holding back heifers in order to rebuild
numbers yet—that is something that likely won’t occur until 2024 or
later. So there is a very good chance that cattle and beef supplies
will be down this year, but that doesn’t mean prices will be higher,
because the demand structure is expected to soften. Next week,
watch for some fireworks when the futures open on Monday
morning and keep an eye on the cutouts for signs that the top is in.
