Beef Wrap March 18
Packer margins got a little more breathing room this week as the
cutouts advanced while cash cattle stayed relatively flat. The Choice
cutout gained $3.64 on a weekly average basis and the Select was
up $2.79. This looks like the beginning of the usual spring rally in the
beef market. How high and how fast it goes remains to be seen, but
for now prices are finally advancing after being on the defensive
since late January. I estimate this week’s margin at $300/head, up
about $60 from last week. The margin should be even better next
week as beef prices are expected to continue higher and packers will
be killing cattle bought this week at steady money. I’m sure cattle
feeders were disappointed by the failure of cash cattle to turn higher
this week and many analysts were blaming external factors such as
the war in Ukraine for holding cattle back this week, but I suspect that
it has more to do with excellent feedyard performance this winter and
the fact that carcass weights are 16 pounds over last year.
Further, carcass weights have been steady at 919-920 pounds for
the last four weeks and this is the time of year when weights normally
drop precipitously. It leaves cattle feeders in a precarious position
where they can’t afford to hold cattle back in an effort to force
packers into raising bids. There is some risk of bunching cattle up
here in the next month or two as rather large placements from the
Oct-Dec period start to become market ready ahead of schedule
because of great weather and performance. There seems to be the
idea among market participants that market-ready supplies won’t
grow burdensome until summer, but if they are finishing ahead of
schedule, we could see the front end supply grow faster than
anticipated. This wouldn’t be much of a problem if packers were
slaughtering aggressively and thus helping to keep market-ready
supplies manageable, but packers seem to be taking a cautious
approach to kills.
They can recognize that beef demand is not robust and thus are
reluctant to push big production into the market before grilling season
demand gets its footing. This week’s fed kill amounted to only 494k,
up 2k from the week before and at least 15k below what our flow
model suggests should be slaughtered during March. The Saturday
steer and heifer slaughter was only about 35k, which is a far cry from
the 55k they were doing at this point last year when demand was
rapidly improving. So, you can see the problem facing cattle feeders.
I suspect that packers will use their leverage to keep cash cattle
relatively steady here in the high $138s over the next few weeks and
let their margins improve as boxed beef values climb. The demand
pendulum has finally swung back in a positive direction and the
combined margin confirms that the bottom is in for this cycle. I don’t
expect demand this spring to be as strong as it was last year
because there are a number of headwinds working against it.
To begin with, the retail prices that consumers see are almost 16%
over where they were last year at this time. Consumers also have to
deal with much higher energy, housing and transportation costs than
what prevailed last year. Further, covid has receded to such low
levels in the US that everyone is treating the pandemic as over.
That means they want to catch up on all of the things they missed
during the pandemic like travel and large gatherings. I suspect they
be happy to forgo an expensive beef meal in order to fill their tanks
and travel to places they were unable to visit during the pandemic.
Of course, just as I say that the pandemic has ended, there appears
yet another variant that is sweeping through Europe and it is
probably only a matter of weeks before it sweeps through North
America. That could push people back into stay-at-home mode and
thus boost beef demand, but my sense is that the population here in
the US is done with COVID whether or not COVID is done with us.
Travel will still happen, large gatherings will be held, and if that
means that the hospitals fill back up with COVID patients, well then
so be it. We have better tools now to combat COVID (vaccines and
anti-viral drugs) than we did in the early days and hopefully that will
keep the next wave from becoming a show stopper. I look for
demand to be best at the lower end of the beef spectrum this spring
and summer and that means grinds could perform better than pricey
middle meats. End meats should get support from very high lean
trimmings prices, but expensive tenders, strips and ribeyes are likely
to see demand considerably softer than last spring. Offtake into the
export markets is expected to remain rather good, with China being
a big customer for US beef over the next few months. I’m projecting
a 22% YOY increase in beef exports through the first half of 2022
and then volumes may track much closer to last year during the
second half of 2022. That would result in a 10-11% YOY increase in
exports in 2022 and that comes on the heels of a 17% increase last
year.
Beef imports are expected to be quite strong also and recently we
have been seeing a lot of Brazilian beef coming into the US market.
ERS data for January showed imports from Brazil at almost 100
million pounds. Last January they shipped 15 million pounds.
Mexico is also shipping more beef into the US. Volumes were up
62% YOY in January. So the strong import gains are coming from
the Americas, and not Oceania where they typically originate. Even
with the strong imports, I expect that the US will be a net beef
exporter again in 2022. Next week, watch the cutouts to see if they
can outpace this week’s rather small gains. That would be a sign
that spring demand is gaining traction. Also keep an eye on carcass
weights because those could be a leading indicator of the next
pricing problem in the fed cattle market.
