Beef Wrap June 3
The cash cattle market continued lower again this week, averaging
$137.84, which was down about $1.25 from last week’s average.
The holiday on Monday reduced beef production for the week and
helped to support the cutouts. The Choice cutout added $3.17/cwt on
a weekly average basis and the Select was up $4.39/cwt. Futures
traders were excited to see the cutout continue on its upward
trajectory, and they added about $1.50 to the Jun and Aug contracts.
The gains were even bigger in the deferreds, which was a bit of a
reversal from earlier weeks where traders seemed to want to extract
some of the premium that had been built up in the late 2022 and early
2023 contracts. Traders were also very enthusiastic to buy feeder
cattle futures, with the Aug and Sep contracts up over $7 on the
week. I’m not really sure all of that enthusiasm is warranted, but after
dismal showing of the beef market leading up to Memorial Day, it isn’t
surprising to see a bit of over reaction to a little good news.
Keeping that good vibe going will be the challenge for next week,
when packers will have a lot more production to move through the
system. Packers are planning on a huge kill tomorrow at 96,000
head, with probably more than 75,000 of that being steers and
heifers. Further, the daily kills this week were very strong and we saw
one day where the estimated fed kill was 101,000 head. I think they
are likely to keep the daily kills close to that level again next week, but
next Saturday will likely be closer to 50k. I’m forecasting next week’s
fed kill at 528,000 head, which would be 50,000 more than what they
did in the current holiday-shortened week. If that forecast comes true,
it would be the largest steer and heifer slaughter week so far in 2022.
Will demand be strong enough to handle that without any price
concession? I don’t think so.
Demand has probably improved a little bit in recent weeks, but at
least part of the recent price gain must be attributed to the reduced
kill. The combined margin is climbing higher, which indicates that
beef demand is on the rise, but we need to keep in mind that the last
2 upcycles in the combined margin were relatively short. My guess is
that this one will be also. There may be some last-minute Father’s
Day buying to get done early next week and if there is, it will likely be
focused on the middle meats. This week’s buying was all about
replenishing following the long Memorial Day weekend. Now
summer is on in full force and that means that consumers will be
hitting the road and taking vacations. That type of activity tends to
boost demand at QSRs and thus ground beef should do well. With
what consumers are having to pay for gas, they will be more likely to
skip the full-service restaurant and go to the QSR instead.
The gains in the cutout were spread across the carcass, which is
another sign that at least some of the price lift came from smaller
production. There is always a lot of enthusiasm around the beef
complex at the beginning of summer. Maintaining that into July and
August is often a challenge, however. Another feature of the supply
side in the last few weeks has been the rapid decline in carcass
weights. The last two weeks have seen 10 pounds come off of steer
weights and that is a bit unusual since weights are normally
bottoming and turning higher in May/June. It is a very welcome
development since the DTDS weights had been very high earlier this
spring and that had me thinking that producer leverage was going to
be non-existent this summer. The leverage meter is still likely to
point in the packer’s favor for most of the summer, but it won’t point
as strongly as it would have had weights not dropped so hard in May.
The passing of Memorial Day has done very little to help the
macroeconomic picture in the US. The stock market continues to be
volatile and on a mostly downward trajectory. Price inflation is still
strong and now gas is routinely over $5/gallon in many parts of the
country. That alone is enough to make consumers feel miserable,
but we have also had to deal with repeated incidents of gun violence
against innocents and that is also casting a bit of a pall over the
normal celebratory mood that comes with the start of summer. So, I
can think of a lot of reasons why beef demand might be tempered.
Packer margins this week were $265/head, up about $50 from the
week before, thanks to rising beef prices and falling cattle prices.
Packers should find it relatively easy to maintain a $200-400/head
margin on the cattle they buy this summer given that feedyards are
full to the brim. Producer margins, on the other hand, are likely to
slip deeper into the red as the summer wears on.
One interesting feature of the spring market this year has been that
the Choice-Select spread has held well below historical norms for this
time of year. The spread normally peaks around Memorial Day and
then works lower into August and that is likely to be the case this year
too. In all, it looks like the cattle and beef complex is in pretty good
balance right now but the overarching theme of eroding demand in
the post-pandemic era remains in place, even though we are seeing
a small upcycle in demand currently. By the time we get to August,
I’m looking for the cutouts to be around $25/cwt lower than today’s
levels and cash cattle to be trading into the mid $120s. Next week,
watch the cutouts for signs that they are struggling under the
production rebound and watch the trims and grinds for signs that
demand through QSR channels is picking up.