Beef Wrap June 11
This week’s weighted average price for cash cattle was almost
exactly $120, pretty much the same level it has been at for the past
five weeks. The cutouts stalled, with the Choice losing $0.23 and
the Select down $3.04. Many market observers are holding their
breath waiting for the cutouts to plummet from these extreme
levels. I’m not one of them. Yes, the cutouts may have a modest
amount of downside risk over the next few weeks as the calendar
moves closer to the dog days of summer, but I really don’t think that
beef demand is going to deteriorate so rapidly that the market loses
value in big chunks.
The primary reason that domestic demand falters in most situations
is because retail buyers find a different protein that offers more
profit potential. In the current environment however, retailers won’t
find much value in either pork or chicken, since those prices are
very elevated also. Plus, I get the feeling that beef movement at
retail is still very brisk and it is hard to steer away from something
that is driving customers into the store. Therefore, if beef prices
pull back in coming weeks, I think it will be because packers are
stringing together larger kills and thus the supply side is pressuring
prices. This week’s fed kill registered 530k, which is near the upper
bound of what we think the labor situation in plants will allow.
There should be plenty of cattle available to fuel kills around 530k
for the balance of June and most of July. For the two months prior
to Memorial Day, fed kills averaged 513k per week, so if the
industry can manage to put a string of 530k kills together, it will
definitely improve availability and thus probably pressure prices
somewhat.
Carcass weights appear to have finally reached their seasonal low
and will likely work higher for the next 4-5 months. That will also
add to beef availability this summer. The combined margin moved
higher again this week, but the rate of increase slowed
considerably. It could be preparing to make a top, but I’d want to
see a couple more weeks of data to verify that. This week, it was
mostly the loin primal that was pressuring the cutout and that
probably reflects the completion of last minute buying for Father’s
Day. The trim markets have firmed up considerably and this week
the 50s printed over $100 once and averaged $98 on the week.
Lean trim is also screaming higher (chart below). The 90s are
approaching $275.
It will be awful hard for the end cuts to lose much value while the
90s are escalating. That leaves the middle meats as having the
biggest potential for a downward correction in the next few weeks.
But even if the cutouts were to drop $20-30 in the next few weeks,
it probably doesn’t negatively impact cattle prices because packer
margins are so wide that they can easily absorb that type of
decline in the cutouts. I estimate packer margins this week held
steady at $1040/head. If the Choice cutout fell to $300 and cattle
prices held at $120, packer margins would still be around $700/
head. That is not a margin situation that would require
management on the cattle side.
We know that packers are struggling to find the labor needed to
run their plants full out. To fix that problem they are going to have
to raise wages and so the cost of processing cattle is going to go
up, maybe by a lot. That means beef prices have to go up also.
So, I think that going forward we are going to see beef pricing well
above what we were used to in the pre-COVID days. In addition
to beef prices going up, cattle prices normally move down when
packer costs increase. The futures market doesn’t seem to be
anticipating that just yet. All of the 2022 contracts are trading over
$130, probably because traders expect food inflation to lift beef
(and thus cattle) prices next year. If cattle prices rise next year, it
will be because the herd is shrinking to the point where it forces
packers to compete for cattle. It won’t just be because packers
are giving part of their margin to cattle feeders. Packers will be
giving more of their margin to their workers.
Right now, there is very little incentive for packers to compete for
cattle. That situation won’t last forever, but it could last many more
months. Next week, all eyes will be on the cutouts for signs that
the top has finally been made. I wouldn’t be totally shocked if they
move higher again.
