Beef Wrap May 21
Cash cattle prices were essentially unchanged from last week,
averaging $119.71 on the week. The cutouts, however, kept pushing
higher, with the Choice adding a little over $9 and the Select up about
$4.60. There are many who are expecting a sharp retracement in the
cutouts now that all of the Memorial Day business is wrapped up, but
I’m not one of them. I think we could see a little softness in the middles,
but keep in mind that Father’s Day follows closely on the heels of
Memorial Day and that is also a big middle meat holiday.
Whatever it is that has driven the end cuts to such high levels is almost
certainly not related to Memorial Day and thus it doesn’t seem
reasonable to expect a big collapse there just because the holiday has
passed. I think that buyers had just better get used to paying a lot more
for beef on an ongoing basis. The labor shortage in packing plants
means that beef production will not be able to expand much beyond
current levels and that situation is likely to persist for a long time. Some
say that once the additional unemployment benefits expire, that will
force more workers back to the job. I don’t really think that the
unemployment benefits are playing as big of a role as people think.
Instead, I believe the pandemic forced workers to look for alternative
employment and many located work in other areas that they found
more enjoyable than their old jobs. I guess almost any job on the
planet would be more enjoyable that working in a packing plant. The
same applies to those who used to work in foodservice, except that the
jobs they found weren’t necessarily more enjoyable, but they paid
better. So, bottom line is that the pandemic caused a huge re-think in
careers for many people, leaving packing plants and restaurants out in
the cold when it comes to the cheap labor they had enjoyed for
decades.
There is only one solution to that problem and that means raising
wages to attract people back into these jobs. When industries pay their
workers more, they have to charge more for their products. That means
more expensive beef coming out of packing plants and more expensive
meals at restaurants. When the price of goods or services rise, people
consume less of them, so this also means a smaller beef industry and a
smaller restaurant industry is the likely long-run result of this labor
pinch. Because the beef industry is comprised of many stages (cowcalf, stocker, feedyards, packers, retailers, etc), coordination between
the stages is accomplished via price signals. So, right now the packing
segment is having a labor problem and it is trying to send the price
signal downstream to the feedyards and cow-calf sectors to slow down
the flow of cattle. Today’s COF report makes it look like cattle feeders
have not yet heeded that signal because placements came in well
above expectations and that just sets the stage for more financial pain
in the feeding sector over the next 6 months or so.
Hopefully, those cattle feeders that did place heavily also hedged by
selling the deferred futures. Anyway, the bottom line is that we have a
supply chain here that is not very well coordinated at the moment and
that means resources will not be used efficiently and also likely
increases the price volatility within the supply chain.
Packer margins this week clocked in at $928/head, up about $50/head
from last week. Packers responded by putting together a very large
Saturday kill by current standards and the weekly total steer and heifer
slaughter came in at 533k. I’d say that represents a practical upper
bound on how many fed animals packers can kill in a week under
current conditions. That big kill may be enough to cool down the
cutouts next week, especially now that Memorial Day purchasing is
done. Cutouts may soften a bit, but I wouldn’t expect them to show
huge declines. Corn prices are well off their highs now and the
weather looks favorable for growing in the near-term. Hopefully, that
will take some of the “commodity supercycle” buying out of the meat
markets in the next few weeks.
Carcass weights do not look very good at present. Steer weights were
reported up 5 pounds this week and they should be declining
seasonally. The DTDS is at high levels. All of this suggests cattle are
not getting marketed on time and thus some backlog is beginning to
develop. The demand side of the beef market continues to look very
robust and the combined margin chart below indicates that we are still
in the upward phase of this very strong demand cycle. Life is rapidly
getting back to normal in the US and people want to celebrate. Beef is
naturally a part of that and they are buying it with both hands,
regardless of the price. This “back to normal” boost in beef demand
will fade at some point, but may last through most of the summer.
Retailers are rapidly raising beef prices, but that doesn’t seem to
matter in the current euphoria. Keep in mind that retail prices are very
sticky—they don’t come down nearly as fast as they go up and so if
demand falters once we get retails up to very high levels, we could see
problems moving product. I think that day is at least 2 months down
the road, but it is probably coming at some point. Next week, watch for
a modest softening in the cutouts led by the middle meats and keep an
eye on those carcass weights because they are looking ominous once
again.
