It doesn’t seem like anyone following cattle markets has any idea what’s going on. The active June fed cattle contract was falling all week to $132, while the cash market continues to trade between $137-148 for live cattle, which is quite a bit of motivation for basis traders to sell cattle, which they have been doing.
Through Wednesday, over 70,000 head moved through the negotiated cash market. This would be the fourth week in a row where negotiated cash trade has sold over 100,000 head each week or more. Perhaps 30 percent have been sold with extended deliveries.
We’ve been talking about how the April 1 cattle on feed number was a record high, which created the speculation that we will have large numbers of finished cattle to process between June and August. The only thing we really don’t know is what the weight distribution of all those March placements were. These cattle will be all over the map when they are ready.
Beef prices haven’t risen as much as expected; the Choice cutout has been trading around $260 most of the month. Packers are still making respectable margins of around $200 per head, even when they are paying cattle feeders $145/cwt for live cattle. Beef demand seems to remain strong going into the grilling season, and the large retailers have been doing their part by offering bone-in rib steaks between $5.70-6.75.
On a Sunday afternoon, our Safeway store was flat out of ribeyes. Beef remains the meat of choice with American consumers, even with staggering inflation. There is more beef on the market than last year, so I’m not sure we can expect to see the cutout move much higher.
Slaughter levels have remained high at around 655,000 head per week and should go even higher as we move into summer. All these fundamentals are telling me that the summer market may not be as soft as analysts are forecasting. Either futures markets are way wrong or cash markets are; I don’t see them moving toward convergence anytime soon. We’re looking at a $14 basis in some cases.
Year-to-date beef production is running 0.8 percent higher than a year ago, while cattle slaughter is just 0.5 percent higher. Clearly, carcass weights have been higher, and feeders have the incentive to make Choice or better carcasses.
However, the slaughter mix has fallen slightly to 82.4 percent Choice and Prime, which may be more about increased cow slaughter rather than lighter fed slaughter. Select beef production is up to 15 percent of the total mix, which is why we have a $12.50 Choice/Select spread.
Feeder cattle markets are trading at the pleasure of grain and feed costs. The last CME Feeder Cattle Index was at $156.24 and trading in a narrow zone. I do expect that when the big summer videos get going and cattlemen are willing to start contracting their yearlings, we could see some expansion in feeder cattle markets. There will also be fewer of them and they will offer a better opportunity to produce Choice or Prime beef carcasses, which will remain in high demand.
I’m sure you have all heard the phrase “Whiskey is for drinking, and water is for fighting over.” Well, I think we may be at that point when the fighting will start in western states. California is being hit very hard on water diversions. The State Water Project said recently that it was going to reduce water deliveries to 5 percent of requested supplies.
Gov. Gavin Newsom (D) said in his most recent executive order, “The ongoing drought will have significant, immediate impacts on communities with vulnerable water supplies, farms that rely on irrigation to grow food and fiber, and fish and wildlife that rely on stream flows and cool water.”
California is in a jam because they have not kept up with the public water infrastructure since the early 1970s, when all of the new federal environmental laws were made.
These environmental laws have cleaned things up, but now we’re looking at environmental law versus feeding the world. Hundreds of thousands of acres of cropland have been fallowed in the most productive farming area of the world. Most of the water is intended to save some spawning routes for salmon. Is there some middle ground here? Perhaps a few less salmon versus food and fiber for the masses. As they say in California, where water flows, food grows. All I can say is keep on praying for spring and summer rains. — PETE CROW
