CAB Insider: Market Update
by Paul Dykstra
Fed cattle prices last week were disappointing to sellers, as Texas and Kansas feeders sold out early in the week at $125-$126/cwt. Some now say we’ve already seen the spring high, but this is not a simple market to sort out, with certain lingering effects from the winter weather that we’ve yet to work through. There should be a lot of pent-up beef demand this spring and carcass tonnage will remain in check as many fed cattle across several regions remain well behind their originally projected finish dates.
The week of March 17th marks another milestone for the Certified Angus Beef ®brand: a record weekly high acceptance rate of 40.8% on a certified head count of 123,877. Genetics and management claim nearly all of the improvement over the historical timeline but consider the effect of prolonged cold temperature on marbling deposition as a positive factor. This is more relevant to the short-term spike we’ve seen in acceptance and marbling scores this winter.
Urner Barry indicates retail ad features last week for grilling items made a big move, with ground beef moving from 16% to 30% of beef ad space. Steak features were up 10% to 43% of ad space while roast features fell seasonally from a 44% share to 25% of beef ads.
Carcass cutout values are behaving as expected. After a decent rally into late March, last week began the typical softening of prices into mid- April. We tend to focus on Easter protein buying of hams and lamb as causing lower beef prices in April, but that’s not the whole story. The market generally just takes a breather before another surge of spot-market beef demand hits with grilling season’s full force in May.
The CAB cutout was lower by $2.42/cwt. last week on a weakening overall beef complex. Ribeyes and tenderloins (8¢ below a year ago at $10.43/lb.) led middles lower, continuing counter-seasonal declines. Other loin items did much better, providing most of the support that the CAB cutout. As the focus moved away from roast items, end meats fell, led lower by the round. Chuck subprimals saw mixed pricing, but generally steadier across the board. Thin meats were also mixed, but flank steaks at $5.32 were the lowest in three years. Look for ground chuck and round to build steam much later in April and into May while the pricier ground sirloin likely won’t see as much price fluctuation in that same time period.
DAIRY DILEMMA INCREASES CULLING
Total U.S. cow harvest so far this year is up 3%, but most of that is from dairy cows, up 4.6%, compared to beef cows up 1.3%. The beef cow culling increase is essentially in equilibrium with the January 1 beef cow inventory increase of 1%, which in turn matches the larger harvest. Dairy cows are another story. The milking herd is much smaller (9.35 million on Jan. 1) versus the beef cow herd (31.8 million on Jan. 1), but the rapid turnover rate of dairy cows brings a larger proportion of cows to harvest (68,000/week this year) versus the longer-lived beef cows (56,000/week this year).
Genetics and management have prevailed in the dairy industry with a 13% increase in milk per cow in the past decade, says USDA. This, combined with strong international production, competition from dairy alternatives and declining per-capita milk consumption has pushed milk prices lower. Front month Class III Milk Futures have traded in a range roughly between $13/cwt. and $16/cwt. since early 2015, reflecting cash prices below breakeven levels for many producers according to sources. Dairy firm sizes vary widely but migration toward economies of scale saw the U.S. lose 30% of licensed dairies in the past decade (3.8% last year) with the average dairy herd increasing from 163 cows to 234 cows in the same period. Meanwhile, production is at full tilt with December data showing milk tonnage rising 0.9% while production per cow was up 23 lb. over a year ago at 1,966 lb. for the month. Culling would seem due to greater efficiency in the face of stagnant demand.
RECORD PRIME, CAB RATE AND TOTAL CERTIFIED
Two weeks ago we investigated the seasonal April phenomenon whereby the switch from a fed cattle supply characterized primarily as yearling cattle to calf-feds takes carcass quality grades to annual lows in the first half of May. We have no evidence to support a departure from this trend in the current environment as the historical data votes strongly in favor of the decline. But let’s not race past the here and now. Instead, let’s turn our attention back just two weeks to recognize freshly minted industry quality records. The most current grading data is for the week ending March 23rd – the second straight week and third week this year with Choice and Prime grades at 83% of the total fed cattle mix. It’s new record territory though, bolstered by a 10% Prime national average. CAB-certified carcasses concurrently shot up to 123,877 head (U.S. and Canada) for the week with 40.8% of Angus-type cattle qualifying under the 10 carcass specifications. To put it in perspective, consider that weekly CAB head counts throughout March 2018 averaged roughly 103,000 head, 20% fewer carcasses from a 4% smaller pool of eligible cattle. March weekly totals 5 years ago pulled in just 28% of eligible carcasses for the brand, an impressive number at the time, yet yielding only 69,000 certified carcasses (55% of the most recent week) during cycle low fed-cattle supplies.
All that said, it’s hard to imagine a spring “quality low” resembling anything like a massive erosion of marbling. Some point to calf-feds apparently 20 to 30 days behind finished projections in many feedlots as foretelling a major quality grade challenge. Cold weather periods have only bolstered marbling levels historically, but this winter has proven harsher for an extended period. The grading pattern that plays out over the next 45 days will be another solid test of those weather impacts on carcass quality.
The Choice/Select spread widened to more than $9/cwt. last week but has retreated in early trade this week to just over $7/cwt. on a weakening cutout. The CAB/Choice spread was predictably weaker at $7.44/cwt. on larger supplies compared to the previous week’s $9.11/cwt. Even so, last week’s packer grid premiums for CAB carcasses at $4.33/cwt. are within the range of last March’s average of $4.40/cwt.