Beef Wrap July 30
Cash cattle traded about steady with last week, averaging $121.05
on the week. The cash market for cattle has been stuck in a very
narrow range between $120 and $123 for the past 11 weeks,
excepting one week where a $125 price was observed. Should we
expect that to change anytime soon? Probably not. The cutouts are
rising rapidly and that means packer margins are also expanding.
So there is little reason for packers to pressure the cash market, but
what about increasing cattle prices? Logically, that should be a high
probability event, but in the current environment where labor
problems are limiting packer’s ability to process cattle, feeders don’t
seem to have enough leverage to move the cash market
substantially higher.
As a result, my cash cattle price forecast remains in the $120-123
range for the next two months. The Choice cutout gained a little
over $7 on a weekly average basis this week and the Select added a
little over $6. The chart below shows that all of the primals
participated in boosting the cutout, but it was the ribs and chucks
that did the biggest part of the work. Packer margins moved out to
$640/head, which was almost $100 higher than last week. The beef
market turned sooner than I had expected and thus I had to do some
major forecast revisions this week. However, once again, the
market is moving higher so fast that it is difficult to keep up with it. I
think I will need to push the forecasts even higher next week. I’ve
held the packer margin forecast in the $600-700 range for the next
two months, but am already getting the feeling that we could be
headed back to packer margins in excess of $1000/head. Beef
demand, which had been fading up until the middle of the month,
has come roaring back with a vengeance. This almost guarantees
that retailers will keep consumer prices elevated well into the fall.
Consumers don’t really seem to care much about how high retail
beef prices are however. As the economy has opened back up and
worker shortages became widespread in some sectors, employers
have been busy raising wages in order to attract the much needed
labor. That, in turn, has put more money into the pockets of low
income Americans who are eager to upgrade their diets and red
meats fit the bill very well. We also have checks now being sent to
low income families with children under the Child Tax Credit
program and that will also hit in a spot where diet upgrade is one of
the first things the money will be spent for. All of that argues for beef
demand remaining strong for longer that we might have thought at
the beginning of summer.
Of course that means price levels for beef will likely be above
earlier projections as well. It could be a tough fall and early winter
for beef buyers. If somehow more cattle could be pushed through
the supply chain, then that would help contain the price increases,
but the labor pinch-point remains. This week’s fed kill came in at
513k, up 3k from last week but well short of the 530k per week that
past placements suggest should be market ready right now. So that
means each week a few thousand head are being backed up and
that is the primary reason that cattle feeders are unable to press
the cash cattle market higher.
The backup is so small that it is not really showing up in carcass
weights yet, but that could change if this under-killing goes on for
many more weeks. Last week’s Cattle inventory report indicated
that the US cattle herd is still in contraction mode and shrunk a little
faster than expected during the first half of 2021. Cow kills have
also been elevated for a long time now as producers thin down
their herds.
The futures market has been expecting tighter cattle supplies to lift
cash cattle prices starting in the very near future, but especially for
2022. The market is correct in assuming that at some point the
cattle supply will shrink enough to put cattle feeders back in the
driver’s seat, but I worry that the market is looking for that to
happen too soon. The futures appear to be stuck in a trading range
that runs from about $125 to $130 on the Oct contract. The bulls
get excited about strong beef demand and a smaller cattle herd in
the future and they bid the market up to the top of that range, then
reality sets in and reminds traders that the cash market isn’t likely
to move much in this environment where labor is limiting packing
capacity, and the market moves lower. This week, early-week
gains were mostly offset by late-week declines so that most
contracts finished little changed on the week. I think the futures will
likely stay stuck in this rangebound pattern for many weeks to
come. Next week, watch the cutout and primals for their rate of
increase, but don’t expect much change in cash cattle prices.
