CAB Insider: Raucous Start to 2019 Beef Supplies

Feeder cattle ends higher and most hog contracts rise.

The year-on-year carcass quality improvements are well underway again in 2019, at a pace that seems almost unrealistic in light of the hand-over-fist progress achieved in each of the past dozen years. Choice and Prime carcasses are up 2.3 percentage points (ppt) in the first 6 weeks of the year, bringing the U.S. average to 82.4% Choice and Prime.

Comparing the largest 3 packing states reveals the most progress in Texas and Kansas plants in the short 6-week comparison. Both states are currently up 4 ppt. in Choice and Prime while Nebraska rounds out the trio with half of that increase on a 2-ppt. bump. Nebraska’s heavy concentration of Prime carcasses at 9.2% of the total pushed the Beef State to 85% Choice and Prime, just edging out Kansas at 84% since January 1st.

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CAB carcass certification rates in 2019 are outpacing the quality grade improvement, averaging 36% of the brand-eligible, Angus-type cattle in the most recent 6 weeks versus 33.5% for the same period a year ago. That’s representative of a 12.7% increase in CAB accepted head count—yet the wholesale CAB cutout premium over Choice is holding strong at an average 6.5% larger margin for the period, compared to a year ago.

This analysis is but for a short-term trend, yet we anticipate another sizeable increase in CAB-qualified carcasses this year, based on slight growth in fed-cattle numbers, a larger proportion of Angus-type carcass eligibility and continued marbling improvement.

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Market Update

Last week’s federally inspected harvest of 596,000 cattle was smaller than anticipated, with Wednesday’s head count reduced by about 10,000 due to weather issues. That was 24,000 head fewer than the prior week, yet just 6,000 smaller than the same week last year. So far this year, the industry has harvested 43,000 head more than a year ago, at 6,000 more per week. The next few weeks should constitute the smallest fed-cattle harvest period of the year; we are aware of one plant scheduled to close briefly this week for maintenance.

Fed cattle market prices were steady with the prior week’s average at $125/cwt. While spring cutout values are poised to move higher on seasonal demand, packer leverage continues to leave cattle feeders wanting a larger piece of the pie. Expectations for stronger fed-cattle prices this spring are likely to be met, but that won’t necessarily work step for step with increases in boxed beef pricing.

Year to date, the Certified Angus Beef  (CAB) brand cutout has averaged $222/cwt. compared to $216/cwt. for the period a year ago. This is a relatively strong showing in context with the increased total fed-cattle numbers, and an even larger supply increase in terms of the higher CAB acceptance rate. Last week’s carcass cutout values were mainly steady in another week of $224/cwt. (up just pennies), with choppy pricing action across the subprimals.

While CAB lip-on ribeyes have maintained relative price strength through the past 6 weeks, they did pull back 7¢ to average $8.05/lb. last week. Even so, the timing is right for prices to make a late-February and March spike beginning now in the spot market. Strip loins, steady at just below $6/lb. wholesale for the past 5 weeks, face a seasonally-driven demand spike like that of the ribeye, but steeper. Tenderloins have cheapened by 55¢/lb. from late January’s $11.40/lb. to last week’s $10.85/lb., but again, recent years have seen a February-March transition with significant price rallies. Top butts found solid spring demand in 2016 and 2017 but looking back to a flat 2018 spring, we’ll wait and see what develops in the weeks ahead.

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The chuck primal remains discounted from overall cutout, the chuck roll at $2.93/lb. being 23¢ lower in one week and that same amount less than a year ago with no reason to expect a rise. Arm roasts rose 28¢ so far this year, and 60¢ above a year-ago valley.

The round subprimals are mostly up in the past few weeks and some solid demand patterns are emerging. Knuckles, eyes and bottom round flats have been showing strength in particular.

Thin meats are performing quite well to way above normal, with skirts historically pricey and flank steaks on their way to a spring demand ascent. CAB grinds are all underpriced.

Cutout Poised to Move Higher

Recent history portends cutout values destined to run higher on early spring middle-meat demand. The beef market has been relatively subdued in recent weeks with buyers sitting aside, waiting for consumer signals for buying to begin in earnest with winter weather playing havoc on purchasing tendencies. Employment numbers are very good and consumer ability to purchase proteins looks rather promising.

Pork and poultry prices are under renewed pressure with issues spanning the gamut but primarily rooted in global trade issues and top-heavy supplies. On the beef side of the equation, the seasonal trend points strongly toward middle meat demand ramping up in the immediate future with an early spring push by end users to secure product. Extended winter weather conditions may stymie some of the buying attitude, but let’s not forget that the wholesale buy can spark activity well ahead of actual retail level sales. Beef packer leverage at this point insulates the packing companies from needing to go “all in” on cattle purchases, regardless of what the boxed product values imply in the expected near-term price uptick. Still, feeders are cautiously bullish in light of recent up-front futures prices and the threat and realization of some deliveries on those contracts.

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