Beef Wrap May 28
The cash cattle market was essentially unchanged this week, with the
average for live transactions coming in at $119.64. In the previous two
weeks, the averages were $119.73 and $119.72, so you can see that
there has been almost no movement in the cash cattle market for three
weeks now. In fact, it looks like someone is intentionally trying their
best to hold the market just below $120. There is a growing sense that
packers are simply being generous and paying $120 for cattle even
though they don’t need too. I calculate their net margin this week at
$981/head, so I guess they can afford a little generosity. Everything
points to a bottleneck at the packing plant level caused by insufficient
labor to run plants at full capacity.
As we were coming into spring, I was willing to grant packers a
$200-300 per head margin because there were some labor issues, but
the labor issues must be far more severe than I envisioned to push
margins up close to $1000/head. That was the big miss on my part and
it is why the cash cattle (and futures) haven’t followed the beef markets
higher this spring. Going forward, this means that getting the cattle
price forecast correct is going to entail correctly predicting what
happens to labor in packing plants. Will it get tighter? Will packers find
a way to entice more workers? My guess is that packers will raise
wages slowly and gauge potential workers’ reaction. It is not
reasonable to think that they can hire on new workers at a higher rate
than existing workers, so they will also need to raise wages for existing
employees. That means their cost per unit of beef produced is going to
rise. And you know who they are going to expect to cover those
increased costs—consumers and cattle producers.
Traditionally, beef plants have made big use of immigrant labor but for
the past four years the US has done everything imaginable to
discourage immigrants from coming to this country. I think that is part
of the problem also. The labor pool for packing plants to draw from has
shrunk due to the actions of the previous administration. So, wages
will be raised slowly, more workers will be hired slowly, and thus it takes
a long time for this labor issue to get resolved. Not to mention that you
just can’t hire someone off the street and expect them to properly debone a round the next day. Training is required. All of this argues for a
very slow return to normalcy and thus exceedingly large packer margins
for some time to come. It also means we shouldn’t expect too much
strength in cash cattle prices while this process is playing out.
Accordingly, I raised packer margin forecasts through the balance of
2021 and that pushed the cash cattle price forecasts lower. The beef
markets, on the other hand, are doing quite well. The Choice cutout
gained $6.50 on a weekly average basis and the Select was up $3.43.
I had fully expected a very strong beef market this spring, but this is well
beyond anything I could have imagined.
Some have suggested that retailers are still pricing their product too
low and that is causing customers to purchase more beef than they
would if retail prices adequately reflected the rapid rise in wholesale
prices. There is probably some truth to that, but how long will retailers
wait to push pricing higher? Given that nothing has been able to slow
the steady rise in beef pricing, I’m of the opinion that price just doesn’t
matter all that much to consumers right now because they are in a
celebratory mood as the pandemic fades. That, of course, won’t last,
and we will eventually get back to a situation where price does matter,
but it might be many weeks or months down the road.
Another point on this bizarre demand situation: Memorial Day doesn’t
seem to matter either. Normally, we expect demand to fall once the
holiday buying is complete, but this year there was none of that. That
tells me that whatever is driving this abnormally strong demand is far
stronger than the normal holiday effect that we see. That is pretty
important because the Memorial Day effect is one of the strongest and
most dependable seasonal trends in animal agriculture. The chart
below indicates that this week, rounds were the biggest contributors to
the cutout’s increase and that is another really unusual aspect of this
rally—end meats have been star performers. The combined margin
chart just keeps moving higher, which is an indication that this demand
strength isn’t done yet. I pushed beef price forecasts higher again this
week and still have this nagging feeling that I’m too low. The fed kill
this week clocked in at only 501k, as packers decided to do a very light
Saturday kill. That was about 35k less than last week and keep in
mind that next week will be a short kill also. So near-term beef
availability is going to tighten up and that doesn’t seem conducive to
lower pricing in the short run.
The weather forecast for Memorial Day weekend looks pretty good
across most of the US, so its reasonable to think that retail clearance
will be good and that means retailers will be back in the market on
Tuesday looking to re-stock. Another interesting aspect to this bizarre
spring market is that high prices haven’t seemed to matter at all to the
export markets. The weekly numbers suggest that beef exports are
running along at the same pace as they were back in March, when
prices were much lower. In fact, I’m projecting May and June beef
exports to be larger than they were in March. I did some upward
revisions to the 2021 export forecast and now have them up almost
17% from last year. Next week, I’m forecasting cash cattle to trade in
the $119-120 range (hey, you can’t blame me for taking that easy one)
and the cutouts to be another $4-5 higher. Packer margins are likely
to break the $1000/head mark soon.
