Cattle markets have gone crazy, setting new record high prices: $188-194 live and $300 dressed in the northern Plains and $180-184 live in the South. Futures markets were much stronger; the longs came into the market and ran the June and August live contracts up to $182 and $178, respectively. There is a large spread between cash and futures. Is $200 possible on fed cattle?
The supply of market ready cattle is thin and appears will become even shorter as summer progresses. Futures markets are perplexing and right now cash is king. Packers were back to a full week’s slaughter schedule and were expected to process 620,000 head for the week. Packer margins were -$10.36 per head the last week of May.
The Choice cutout has moved much higher to $3.27, which is a record high for this time of year. Pork is inexpensive and will give beef strong competition this summer. Beef demand is our greatest risk going forward and it will become more expensive for consumers.
Feeder cattle markets were also much stronger, $8-14 higher, and the video auctions are starting to test the yearling and calf market for fall delivery. Cattle feeders are paying lots of money for replacements to try to maximize capacity and they will start buying lighter cattle just to secure future inventory.
Speaking of capacity utilization, packers will be using less of their operating capacity in both cow and fed cattle plants—lower utilization will cost them money with lower throughput. Cow slaughter has slowed down dramatically. Recent rains in much of cow country has allowed cow-calf operators to keep cows that can be bred. We’ve seen slaughter cow prices have been as high as $143 in some areas of the country.
John Nalivka at Sterling Marketing has run the numbers of packing capacity and reported, “We currently have annual fed cattle slaughter capacity of nearly 29.7 million head (Sterling estimate), which works out to 572,000 per week or 104,000 per day on a 5 1/2 day week. With weekly fed cattle slaughter averaging 487,000 through May 20 this year, packers have used on average 85.2% of capacity on a weekly basis. This compares to 88.2% for the same period a year ago and 89.5% for all of 2022. This decline in supply is largely the result of a 5% drop in the number of steers in the slaughter mix with the number about equal to the same period in 2014. Heifer slaughter through May 20th is about equal to a year ago but will also decline significantly as we progress into the second half of the year.
“For 2023, I am estimating plant utilization in fed plants to average 86% and 82% during 2024. Assuming packers maintain current capacity, and that remains to be seen as a likely scenario, this low supply / capacity ratio will lead to strong packer competition for cattle support for fed cattle prices.
The capacity utilization issue in cow plants is even more dramatic as producers hold cows in response to higher prices and sharply improved forage conditions in most regions. Annual cow slaughter capacity is 8.2 million head (Sterling estimate) or 157,000 per week and 27,000 per day on a 6-day week. Weekly cow slaughter from Jan. 2-May 20 averaging 131,000/week leaves average utilization of cow slaughter capacity at 83.6% compared to 87.4% for that same period a year earlier. For all of 2022, utilization was 87.5%. I expect slaughter utilization in cow plants to average 80.4% for all of 2023 and averaging 65% for 2024 as new capacity is brought online and close to the figure for 1994 when significant consolidation of capacity began.
“The market equation is much more complex than just tighter cattle supplies. As these reduced numbers play into capacity in both the packing plants and feedlots, utilization becomes the key issue. Consequently, the goal of increasing capacity must be considered along with the question of how much current capacity will be retired and who will retire that capacity.”
We also have new packing capacity coming online over the next few years. It would appear there could be some plant closures as there were in 2014, like Cargill’s closure of their Plainview, TX, plant, which hurt southern Plains feeders. History does have a habit of repeating itself. — PETE CROW
