The worst appears to be over for the beleaguered cattle markets. Average weekly feeder cattle prices have edged above their levels in late March before the COVID-19 pandemic began to unleash its full impact on the U.S. meat and livestock industry. Live cattle prices have also largely recovered. But keeping prices anywhere close to current levels this summer will depend on three key factors.
The first is the behavior of the futures market. The market acted irrationally last August after a fire closed Tyson Foods’ Holcomb, KS, beef plant for the rest of the year. Tyson and other packers raised slaughter levels in the next four weeks to more than make up for the plant’s loss. But the futures ignored this and sold off heavily. This forced cash live cattle prices to lose more than $12 per cwt live in five weeks.
The futures market also panicked after the onset of the pandemic. The result was that from Feb. 21 to April 6, the April live cattle contract lost 30 percent of its value and the June contract lost 27 percent. I find it interesting that no one has called for an investigation of the futures market’s behavior.
The June contract as of last Tuesday was $17.66 per cwt discount to the prior week’s average cash price of $117.06 per cwt. The assumption is that the contract will come nowhere close to convergence with cash prices. This means the latter will deteriorate as the month goes on. Current forecasts are for cash prices to reach a low of $105 later in May. But they will not fall as low as they did towards the end of April.
The next factor is how quickly the beef chain clears the backlog of cattle inside feedlots and then the backlog of cattle outside on pasture that should have been placed. Clearing these will depend on processing plants remaining open and continuing to increase their weekly slaughter levels. Any new spike in COVID-19 cases among plant workers might temporarily close plants again and keep the feedlot backlog in place.
Cattle slaughter levels hit an historic low of 438,614 head the week ended May 2, which was 60 percent of capacity. Kills then picked up as packers implemented multiple measures to keep their workers protected and reassure them that plants were safe. Weekly cattle slaughter levels reached an estimated 555,000 head the third week of May (76 percent of capacity). But kills were lower again the following week because of the Memorial Day holiday. So an estimated 1 million cattle that should have been shipped were backed up in feedlots on June 1.
Questions also remain as to when beef plants will be operating at full capacity again. It might not occur this year even if plants are fully staffed. Social distancing of workers will continue to force production lines to run slower than under pre-pandemic conditions. Only when this distancing is relaxed might line speeds return to normal and thus weekly production levels.
The third factor involves beef sales at retail and in the foodservice sector. As by far the highest-priced of the three main proteins, beef generates far more dollars than any other protein. It is also more prone to bigger price changes than the other proteins.
This is exactly what showed up in April. USDA data showed that USDA’s All Fresh beef price averaged $6.22 per pound, up $0.26 from March. The Choice price averaged $6.44, up $0.39. Both prices were up 6-7 percent from a year ago, the biggest year-on-year increase in retail beef prices in decades. In contrast, pork prices averaged $3.89 per lb., up four cents, and chicken prices averaged $2.03 per lb., up 10 cents.
This was well before wholesale beef prices began to skyrocket in mid-April. Through the second week of May, USDA’s weekly comprehensive cutout rose $198.15 per cwt in four weeks to average $421.80 per cwt. This was up 94 percent on the same week last year. This meant far fewer retail beef features. The Memorial Day weekend was one of the weakest Memorial Day holidays for beef features as measured by store counts. All categories are down from previous years and feature prices were higher. Total beef ads were down 48 percent from last year, with ground beef ads down 37 percent, rib ads down 19 percent, loin cuts ads down 44 percent, round ads down 69 percent and chuck ads down 91 percent.
Retail features are crucial for beef sales at any time but especially in the summer when beef production seasonally increases. But May retail beef prices were likely far higher than in April and retailers will again this month have higher everyday prices and few beef features. Beef sales will suffer as a result. — Steve Kay
(Steve Kay is editor/publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707-765-1725. Kay’s Korner appears exclusively in WLJ.)