Beef Wrap May 13
The cash cattle market started to work lower this week, with live trade
averaging $142.39/cwt, about $1 below last week and the dressed
market averaging $229/cwt, about $1.50 below last week. The
cutouts were lower again this week, but the declines slowed somewhat
as the Choice lost $1.34/cwt and the Select lost $3.64/cwt. Packer
margins continued to compress and are now only $175/head. Last
year at this time packer margins were close to $900/head. That
dramatic difference in packer margins reflects a much different
demand environment this May compared to last year. We can see
further evidence of that in the attached combined margin chart. It is
clear that demand is still in a downcycle and is now lower that it was
back in the beginning of 2021 when the great demand bubble began to
emerge. It has been my contention that demand is heading back to
more normal levels. If you want to know what “more normal” demand
looks like, check out the combined margin chart between early 2018
and the middle of 2019.
There was a mini-demand bubble at the end of 2019 caused by the
Finney County plant fire that suddenly shorted the beef market and
sent buyers scrambling to find other sources of beef. While the trigger
was an abrupt loss of supply (a big plant went down), the ensuing
buyer panic shows up as stronger-than-normal demand and indeed it
is. If you look at the 2018 to mid-2019 period, you will notice that for
the most part the combined margin traded between +$100 and -$100/
head. Unless another black swan event rears its head, that range is
likely what we are headed back toward. That means way softer
demand going forward than what we came through in 2021. This
week it was the round and loin cuts that put the most pressure on the
cutout. Ribs managed to contribute a small positive to the cutout, but
the gain was pretty paltry for this time of year. In the next few days,
buyers should be wrapping up any last minute needs they have for
Memorial Day features. It wouldn’t surprise me to see the cutouts
actually post a modest gain next week as that business gets done.
After that however, the cutouts are likely to go back on the defensive
again. There will likely be some Father’s Day buying to complete in
late May/early June, but given the current trajectory of demand, I’d be
surprised if it can turn the cutout measurably higher. After next week,
the forecast has the cutouts working steadily lower and we could see
the Choice cutout in the $235-240 range before the end of June. If I’m
right about the trajectory of the cutouts over the next couple of months,
packers will need to put some serious pressure on cash cattle prices in
order to keep their margins intact. Fortunately for them, conditions
should swing the leverage meter in their favor and thus help in that
regard. Past placement patterns tell us that the number of market
ready cattle is going to grow from now through at least July, and
maybe beyond.
Carcass weights still look pretty heavy. Steer weights were reported
five pounds lower this week, but blended carcass weights are still 10
pounds over last year. Further, we are now at the point in the
calendar when carcass weights start to increase seasonally, so we
could see even greater supply contribution from carcass weights over
the next couple of months. Next Friday, we will get a fresh Cattle on
Feed report from USDA and I’m expecting it to show April placements
down 4.8% from last year. That sounds like some supply reduction,
but even that would still be 4.2% greater than 10-year average
placements for April. Those cattle won’t be ready for slaughter until
well into the fall, so it won’t do anything to relieve the near-term supply
bulge that is coming. If I’m close on placements, the May 1 feedyard
inventories will be 1.3% greater than last year. Bigger cattle supplies
than last year combined with way softer demand than last year is the
recipe for much lower beef pricing this summer.
The export market might help to take some of that product off of the
domestic market if price levels get low enough, but the USD is likely to
remain very strong and that could work to temper some of that export
demand. And, as I’ve pointed out before, there has been a big
increase in imported beef flowing into the US. That isn’t likely to
change dramatically and could easily offset any gains in exports this
summer. This week, USDA reported that retail beef prices increased
five cents per pound in April and are now almost 15% stronger than
last year. At the wholesale level, the blended cutout was 3.4% lower
in April than it was a year ago. Clearly, retail margins on beef are very
good right now, but I would look for retailers to start cranking down
retail prices and offering hotter features once we move beyond
Memorial Day. That will be needed in order to improve product flow
through the system because cattle slaughter and beef production are
both likely to increase from this point forward. Compared to the past
couple of grilling seasons, this one has been much more sedate and
prices have been better behaved.
Given the troubles in the macroeconomy (inflation, falling equity
markets, poor consumer confidence), I don’t think we are at risk to see
any substantial demand surges this summer. Demand will still cycle
and produce some ups and downs in price levels, but the amplitude of
those changes should be much smaller than in the past couple of
years. My fundamental analysis suggests that the bias throughout the
summer should be toward lower price levels, so buyers should
probably be cautious about extending coverage too far forward for the
next few months. Next week, watch for some modest increases in the
middle meats as the last-minute Memorial Day business gets done
and look for further softness in the cash cattle market.
