Beef Wrap June 10
The beef cutouts continued higher this week, with the Choice gaining
$3.81/cwt and the Select up $0.41. The cutouts started to struggle
some near the end of the week and that makes me think that the early
week gains were at least partly a function of the short kill the week
before. The gains were spread pretty much across the carcass
which also supports the idea that the short kill had a hand in this
week’s gains. Cash cattle posted a surprising turn around, averaging
$140.50, which was up about $1.50 from the week before. It is not
clear to me why cattle feeders were suddenly able to extract higher
money from packers after prices moved lower in each of the past 4
weeks. Some of it might be attributable to the way cattle have been
grading lately. The attached chart shows the percentage of beef
grading Choice or higher has fallen well below the levels seen in the
last couple of years.
At the same time, consumer demand for Choice product has been
increasing, so perhaps packers are having to reach more to find the
quantity of Choice-grading cattle they need and in some weeks that
may require higher cash prices. The Choice-Select spread averaged
over $20 this week. There has been a lot of chatter from the cowboys
about how current feedyards are these days and perhaps that is also
a factor. Cattle carcass weights continue to decline well beyond
where I thought the bottom would be and the DTDS weights have
dropped like a rock over the past 4-5 weeks. Super-high corn pricing
is probably causing cattle feeders to try and get cattle marketed as
quickly as possible so that they can save some on the feed bill.
Packers have played into that hand by keeping kills relatively strong
over the past month or two. Still, the number of cattle on feed is
record large right now, so at some point I would expect cash cattle to
continue trending lower. Packers will feel a margin squeeze next
week when those more expensive cattle show up at the packing plant
and cutout values are likely to be declining.
I calculate this week’s packer margin at around $310/head, but it is
likely to fall back below $250/head next week. It appears that the
days of super lucrative packer margins are now behind us. By the
time that we get into the second half of July, packer margins could be
solidly below $200/head. I don’t think there is much risk of them
going negative this summer, but the $800+ margins that we saw in
the summers of 2020 and 2021 are clearly off the table. This week’s
fed kill came in close to expectations at 529k, up 50k from the
previous week’s holiday shortened kill. I think we can expect a
steady stream of fed kills in the 520-530k range for the next couple of
months. That isn’t a big problem right now when lingering holiday
demand from Memorial Day, Father’s Day and Independence Day is
boosting consumption, but the seasonal suggests that demand will
suffer beyond the first of July.
The combined margin moved higher again this week, indicating that
we are still in the upcycle phase of demand but I expect that we will
see the combined margin turn lower within 2-3 weeks and it could
actually happen next week. All of the demand headwinds that I’ve
discussed previously: inflation, lack of stimulus, pandemic fading,
declining equity markets, remain in place. In fact, equity markets
took another dive toward the end of this week and it is looking like
there may be a lot more downside there. When consumers see their
stock portfolios losing money week after week, they feel poorer and
reflect that in their purchasing habits. The University of Michigan
consumer confidence index was released today and it dropped to its
lowest level since the series began back in the 1950s.
That is not the type of environment that would encourage robust beef
demand. So the demand story remains the same: we are in a brief
seasonal upcycle right now, but the longer-term trend towards softer
demand remains in place and will probably carry through the end of
this year, if not beyond. It doesn’t look like futures traders want to
hear that however, because they added more premium back into the
deferred contracts this week. Maybe they aren’t thinking too hard
about demand and are just focused on an eventual tightening of the
cattle supply. That could be a huge mistake because often demand
turns out to be a bigger price determinant than supply. And even so,
there is nothing bullish about the supply side for the remainder of
2022.
