Hot U.S. beef market set to cool off

Cattle futures are up because the market is looking at the smaller U.S. and Canadian cow herds and lower feed supply.  |  Jeannette Greaves photo

Analysts expect prices to decline but eventually level off at values higher than what were seen before the pandemic

The American beef market is declining and likely to work lower after a spring of phenomenal demand, says an analyst.

Rob Murphy, executive vice-president at J.S. Ferraro, said the market is backing off toward normal.

“I don’t think that it’s going to go completely kaput and we’re going to be back to say 2018 or 2019 type demand levels,” he said during a third quarter outlook. “This is just a cooling-off period we’re going through now as the market comes down to more realistic levels.”

Murphy said once the big declines are past, he expects price levels higher than before the pandemic.

Producers haven’t seen the high values in the cattle market that beef has, however.

Murphy said there has been “an interesting disconnect” between the two in the last few months. They typically move in tandem but at the end of April and into May cut-out prices continued higher while cash cattle stagnated between $120 and $125 per hundredweight, where they still sit.

Packing plants, which were seeing incredible margins of up to $1,000 per head, complained they didn’t have enough labour to process more, he said.

“That bottleneck that developed surrounding the labour situation in packing plants in May really caused the beef market to disconnect from the cattle market and caused packer margins to soar,” Murphy said.

Canadian livestock analyst Kevin Grier called packer margins “something for the history books.”

The fire at the Tyson plant in Holcomb, Kansas, in 2019 boosted margins at first, and the pandemic backlog in 2020 boosted them again.

Murphy said he expects packer margins to work their way lower as well. They have started to come back down as the cutout has fallen and the cash cattle market firms.

“We’re on our way back to more normal packer margins now after a very exceptional spring,” he predicted.

Any labour shortage at packing plants should be alleviated by moderating beef production through August. Demand for choice cuts and higher will remain strong through the summer grilling season, Murphy said, but the supply of cattle grading that high is dropping, likely due to higher corn prices and the resulting cost to feed to that grade.

The U.S. slaughter level in June was below the 2017-19 three-year average but July is a big month, Murphy said.

“I think we should do close to 525,000 to 530,000 head in July and if we don’t achieve that, that just means we back some cattle up for the next month,” he said.

By August and September those numbers should come down to 510,000 to 515,000 and remain there into October.

He said feedlot placements could be limited this summer on higher corn prices and that is something the industry should watch.

Currently, feedyard placements are encouraged by high deferred cattle futures.

He also said carcass weights are at good levels after being excessively heavy since the Tyson fire. This should give feeders some leverage in negotiations with packers.

Murphy suggested beef demand could be strong into September. While pandemic stimulus money is ending, a new child tax credit is coming in the U.S. that will put more money into the pockets of some of the poorest households, he said. Add in high pork prices, high savings rates, equity market gains and a high protein diet, and beef will benefit.

In Canada, Grier said high beef prices and a lack of featuring at retail led to a ho-hum spring.

On the cattle side, second quarter slaughter was much higher than last year’s “catastrophically low” slaughter and was even higher than he expected.

“These plants put in more Saturdays than they thought they would,” he said. “Going into the third quarter I still see if you’re a Canadian beef buyer you’re going to see plenty of supplies this third quarter based on placements.”

Grier also said cow slaughter has been robust and likely to get more so as the drought takes its toll.

Gateway Livestock analyst Anne Wasko said forced movement of cattle is showing up in the markets with fall delivery calves trading down from one week to the next.

On July 1, Canfax reported cattle-on-feed numbers were down one percent. However, June placements were up 34 percent, and there have been six consecutive months of year-over-year increases in placements to western Canadian finishing feedlots, she said.

“We were originally expecting the second half of 2021 to see our feedlot numbers back off a bit,” she said during a field day.

Slaughter rates are high in part because packer margins are so strong, In the first six months of the year fed cattle slaughter is up 15 percent over last year, and eight percent over 2019.

Cow slaughter is up six percent January to June but 20 percent in June alone, Wasko said.

Futures are up because the market is looking at the smaller U.S. and Canadian cow herds and lower feed supply, she said.

“The expectation is that prices will be higher going forward, but it’s awfully hard to stand up here today and talk about that when… we’ve got to get through 2021.”

One bright spot in the last while has been the price relationship between Alberta and Nebraska steers. Typically, Alberta steers are lower by $3 or $4, but in 2021 Alberta has had the highest prices in North America, said Grier.

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