Beef Wrap May 14
Cash cattle traded in the $119-120 range this week, up about
$1.50 from the week before. Strong gains in the futures early in
the week likely prompted packers to pay up, but the market sold
off hard on Thursday and that brought the higher cash trade to an
abrupt end. Packers had plenty of extra revenue to pay for cattle
this week, given that the Choice cutout added almost $10 and the
Select cutout was up $9. Of course, packer margins expanded
once again, adding almost $100/head and the margin is now
around $855/head (I recently revised the margin calculation to
reflect higher labor costs, so that is why this week’s margin
appears to be less that what was reported last week.)
Once again, the Choice cutout exceeded my target level for a top
and forecasts had to be raised. It seems to me that we can
expect the cutout to gain again next week as the finishing touches
are put on Memorial Day buying, but that could very well be a
near-term top in the cutout. Who would have thought that chucks
and rounds would be more influential to the cutout in the second
week of May than ribs? That is exactly what happened this week.
In fact, the chart below indicates that all of the primals were
higher this week, with the exception of a tiny drop in the 50s. The
uncharacteristic strength in end meats at this time of year is part
of what makes me think that a shift in consumer dietary patterns
toward more high protein diets is partly responsible for the
incredible demand strength that we’ve seen this spring. Those
consumers don’t necessarily follow the normal seasonal
consumption pattern. They are just looking for protein variety.
The combined margin chart below shows that the current demand
upcycle is still in play and by far the strongest we’ve seen outside
of the COVID-related plant shutdown period last year.
My guess is that demand will cool off some once we get to
Memorial Day, but I wouldn’t expect it to fall sharply. It is pretty
clear to me that a lot of the recent demand strength is unrelated to
the holiday and so it wouldn’t make sense to expect demand to
retrace rapidly once the holiday is behind us. Supply
considerations will also help to support prices beyond Memorial
Day. Packers are struggling to keep plants fully staffed right now
and that is not going to be a short-run phenomenon. I’m
estimating that this week’s fed kill might only be 495k. That’s
about 10-15k below what I think the supply would support and it
will probably cause some minor backing up in feedyards.
There is not much doubt that with $850/head margins, packers
would kill everything they could get their hands on if they had the
capacity to do so. So, the only conclusion that I can make is that
they don’t have enough dependable labor to run at full capacity.
It is more of a problem for cattle producers and beef buyers than
it is for packers however. This super-tight labor situation is
driving a big wedge between beef prices and cattle prices, raising
the beef price and pressuring the cattle price. To rectify the
situation, cattle feeders need to put the brakes on placements in
order to scale back on-feed inventories.
Drought is also reducing pasture availability and thus driving
more cattle into the feedyard than would otherwise be the case.
As long as cattlemen continue to place like it’s a pre-pandemic,
2019-type market instead of a labor-constrained, 2021-type
market, packer margins will stay uncharacteristically wide and
cattle prices will underperform. Cattle feeders are very fortunate
that we’ve had such strong demand this spring or else cattle
prices would be a lot lower. Given super-high feedgrain costs, I
estimate that cattle feeding margins this week were in the red to
the tune of $170/head. Persistently negative margins are the
market’s way of sending a signal to downsize. Of course, beef
buyers who are staring at a $313 Choice cutout right now don’t
think the industry should downsize at all. Very strong demand
from consumers is saying “expand”, but the labor wedge in the
packing sector is telling producers “contract”.
These mixed signals are not good for the long-run health of the
industry. In the end, consumers will pay more for beef, producers
will get paid less for cattle, and the industry will be smaller than it
would be had the labor problem not arisen. Next week, watch
the cutouts for signs that a top is forming and watch the reported
carcass weights for signs that feedyards are losing currentness
due to these unusually light May kills.