Beef Wraps

The slide in beef prices continued this week, with the Choice cutout
dropping $5.11 on a weekly average basis and the Select cutout
down $8.39. Cash cattle finally turned lower, dropping almost $3
from the week before to average $140.76. Packer margins finally
narrowed enough that packers felt the need to put some pressure on
the cash cattle market and they were helped along by the escalation
of hostilities in Ukraine, which made the market very jittery. There
has been a lot of talk about how the war in Ukraine will hurt beef
demand and while there is some truth to that, we need to recognize
that beef demand was on the decline well before this war started. In
my opinion, the end of the pandemic posed a bigger threat to beef
demand than the war. However, the war will certainly exacerbate
inflationary pressures across the economy and that will stretch
consumer’s budgets to the point where they will likely decide they
can forego that expensive steak and make do with pork chops or
chicken.

Beef is the most vulnerable protein as the demand side resets in
2022 following an epic demand year in 2021. That said, we are
beginning to see spring-like weather in the Southern US and that
should bring out some seasonal demand improvement for grilling
items over the next few weeks. My guess is that the cutouts will put
in a bottom next week and then start grinding higher as middle meat
prices begin to improve. This week it was the chucks that were the
biggest drag on the cutout. Brisket prices were lower early in the
week, but began to improve near week’s end. That may be tied to
last minute buying ahead of St. Patrick’s Day. The combined margin
is still heading lower and it is clear that this next bottom will be well
below any bottom that was made during the “great demand bubble”
last year. This looks like a sign that demand is working its way back
to more-normal levels. It will be interesting to see how quick the next
upcycle develops. I expect that it will be slow to get started, but will
probably show stronger gains once we get beyond March.

I don’t expect packers to immediately begin to pay higher money for
cattle just because the cutouts bottomed and turned seasonally
higher. They will probably keep some pressure on the cash cattle
market for a couple of weeks and then let it go sideways for a while
as their margins get back on good footing. I calculate this week’s
margin at $218/head—the smallest packer margin in over a year. I
expect it will slowly grow from here, but don’t look for it expand back
out to $600-700 head like it did last spring. Cattle feeders are
probably not in the best negotiating position right now. Steer carcass
weights were 3 pounds higher this week as they rebounded from last
week’s sharp drop and the DTDS is at very high levels. Steer
weights are now 12 pounds over last year.

I think feedyards need to move cattle and that is evidenced by the
fact that there was some cash trade today at $138, $2 back of the
weekly average. The basis to the futures has made a gigantic shift
in recent days, as Apr LC fell below $136 today. That is telling cattle
feeders that the longer they wait to sell cattle, the less they will get
for them. The futures market has done a huge reset over the last
couple of weeks. Apr has moved lower for eight trading sessions in
a row now. In those eight days, the market has wiped out almost all
of the value that Apr gained since last September. That is the way
that cattle futures trade: they grind slowly higher in an uptrend, but
when the market turns lower, the selling is swift and prices quickly
cascade lower. Needless to say, the speculators, who typically play
the long side of the market, are not happy with the events of the past
two weeks.

Those cattle feeders that had the presence of mind to hedge back in
mid-to-late February when the market was near its highs are
probably breathing a sigh of relief. This week’s fed kill came in at
509k, which was 6k above last week and pretty much right in line
with what the flow model says we should be killing in early March.
We will likely see fed kills hold in the 505-515k range for the next
several weeks. There are more cattle in feedyards right now that at
any point in the past. That alone seems pretty bearish to me. If the
beef market can muster a rally in the next couple of months, it will not
be due to tight supplies, but rather due to seasonal improvement in
beef demand. Lower pricing in the beef complex seems to be
attracting the interest of international buyers as the weekly export
numbers have looked pretty good recently. That helps, but it won’t
be enough to substantially boost the market this spring. We will get
the official export totals for January on Wednesday.

Grain markets have been highly volatile and moving higher since the
invasion of Ukraine and it looks like the world will have to do without
any grain from that region of the world for at least a few months.
That is a big problem because the S. American crop is struggling and
there is a lot of dryness in N. America as well. The cost of feed is
going to be way higher this year than last and that means cattle
feeders will do their best to push feeder cattle prices lower to
compensate. Feeder cattle futures did a huge reset lower this week
also. That won’t encourage cow-calf producers to begin expanding
their herds. Herd expansion plans will likely have to wait until 2023
or beyond. Next week, watch for early cash cattle trade at lower
money. If that happens, it is usually a sign that cattle feeders feel a
sense of urgency to move cattle and could signal a new downtrend in
the cash cattle market.