Beef Wrap January 9
This week’s cash cattle trade averaged $157.78/cwt., almost steady
with last week. Cattle in the Southern regions traded at about a $1/
cwt. discount to those in the North. The cutout held up very well, with
the Choice adding $3.54/cwt. and the Select gaining a whopping
$8.19/cwt. Packer margins stayed essentially flat with last week at
$77/head because even though the cutouts were rising, packers
were killing cattle they had paid up for the previous week. The most
impressive thing in the entire complex is the continued strength in
middle meat pricing. The rib primal only declined a little this week,
but the loin primal actually posted a gain. This is normally the time of
year when consumers and beef buyers are rapidly backing away
from pricey middles, but that hasn’t been the case so far. Perhaps
clearance on those items was better than expected over the holidays
and so that generated a lot of fill-in interest. If that is the case, then it
is just a matter of time before the ribs and loins move substantially
lower. The next major holiday for the middles is Valentine’s Day, but
we should see some erosion in demand before that arrives. End
meats are somewhat pricey too right now, but that is fairly common
for early January. The reduced kills of the last three weeks have
probably caused some short-term supply tightness that is supporting
prices. Packers will take care of any supply issues next week when
the kill returns to normal. For the past three weeks, the fed kill has
only averaged 426k. This week, which was missing the Monday kill,
came in at 429k and that needed a sizeable Saturday slaughter. I’m
looking for packers to push the fed kill into the 505-510k range next
week. It is hard to imagine that the cutouts won’t be pressured lower
under the weight of that production. Another thing that has limited
production recently is a sharp drop in carcass weights that started
with the polar vortex that hit cattle country during the week before
Christmas. USDA released the official weight data for that week on
Thursday and it showed steer weights down 7 pound from the prior
week. Normally in a holiday-shortened week (that Saturday was
Christmas Eve), we see carcass weights increase, so that big drop
was definitely an aberration that was likely due to the weather. Early
indicators are suggesting that when we get next week’s weight data,
it too will show a weight decline right in the middle of the holiday
period. However, from late December onward, the weather has been
much warmer across cattle country, so it is reasonable to expect that
weights will not continue lower at that rate of speed. In fact, the
weather forecast is projecting temperatures well above average in
the Midwest for the next couple of weeks. That should help dry out
feedyards and limit weight losses.
After next week, I’m looking for packers to slowly work the fed kill
lower and by the time February arrives it may only be around 490k
per week. That is based on past placement patterns that suggest
fewer market-ready animals during the Jan/Feb period than what we
saw in Q4. Of course, demand is usually weaker in the Jan/Feb
period as well, so smaller fed kills do not necessarily imply higher
beef prices. In fact, beef prices look pretty high right now with the
Choice cutout over $280/cwt. Pork and chicken both offer better
values for retailers and they may lean in that direction for their Feb/
March feature activity. There is also a pretty good chance that
retailers will push their everyday pricing on beef higher in the next
few weeks in order to try and regain some of the margin that they
lost in December. This week’s combined margin chart tells an
interesting story. It looked like the margin was headed into an
upcycle, but now it has turned sharply lower once again. On the
surface that seems somewhat odd since the cutouts are still rising.
When I investigated the cause of the margin downturn, I found that it
is being driven by cattle feeding margins moving lower. The issue
here is that from late July until late August, cash feeder cattle prices
escalated from about $170/cwt. to $180/cwt and those are the cattle
that are now coming to market and the breakevens on those cattle
have risen much faster than spot cattle prices have. My margin
model shows that those cattle need to bring almost $170/cwt. to
breakeven. Obviously, cattle are trading well below that. Did cattle
feeders pay too much for feeder animals back in August? Yes, it
appears so. Will that prevent them from over-paying for feeders
again? Not likely. They are slow learners. But at least they are
getting reminded that, so far, it hasn’t worked very well to pay $180+
for feeder animals. And now the futures market is telling us that they
will be paying $207 for feeder animals this fall. It will take some very
high fat cattle prices to make that work financially, certainly a lot
more than the $168 the April 2024 LC are trading at. Heck, $168
fats wouldn’t be enough to cover the cost of feeders they paid $180
for, much less $207. The point is that something is seriously out of
whack here. It was the same way last spring, with fall FC futures
trading way above where they eventually settled. However, these
high breakevens will keep cattle feeding margins in the red for a long
time and that means they won’t take very kindly to packers
suggesting lower prices for fed cattle. There is probably a day of
reckoning coming in the not-to-distant future when the cutouts
tumble and packers want to buy cattle cheaper, but cattle feeders
resist mightily. Next week, watch for the cutouts to turn lower as the
industry gets back to full production. Packers might not get cattle
bought cheaper because they have some margin to give, but it won’t
take much to put them back in the red as well.
