Food safety has often been described as a “nonnegotiable” quality characteristic in the National Beef Quality Audit (NBQA) data, so that factor aside, what’s the negotiable priority? The 2005 NBQA survey results from purveyors, restaurateur and supermarket sectors showed the top concern in a Top 10 list of beef quality challenges was insufficient marbling. We’ve come a long way since 2005 with eating-quality enhancements now well documented in terms of marbling and quality grade. But there was much speculation over those years that increasing supplies of Choice and Premium Choice branded products such as the Certified Angus Beef brand would make product so widely available as to diminish carcass and live-animal premiums paid.
The 2017 spring grilling season demand shows a much more positive outcome and a growing trend that runs contrary to those concerns, exemplified by a Choice-Select spread of more than $30/cwt. in early June.
The accompanying chart further illustrates that CAB premiums for qualified carcasses, already amounting to more than $50 million per year for some time, have not decreased. Those hit all-time highs as recently as the week of June 19th. While the average CAB premium paid by packers that week was $6.35/cwt. over Choice and on each qualifying head sold on grids, the top of the range paid by at least one packer reached a record $14/cwt. While we did see CAB acceptance of eligible carcasses dip to a seasonal low of 28% in May, product sales tonnage is running in the area of 12% above last year’s 1-billion-lb. record. A lack of supply is definitely not the issue, as reported three weeks ago regarding the robust supply of CAB-eligible cattle. We must also give a nod to the fact that a very large U.S. retailer reintroduced a Premium Choice Angus brand to its shelves in 2017, upping the ante for total demand for carcasses fitting the category. That added support for cattle that qualify for CAB and competing premium Angus programs.
Last week’s fed cattle harvest was not as large as two weeks earlier but the 632K head was second largest, year to date. Combining data from the previous five years tells us last week is typically the largest one for yearly fed cattle harvest. The significant decline in fed cattle price is a sign of another shift in leverage, a major theme in our markets since the drought of 2012 kicked off a series of events where supply has ruled the day. Essentially we are now seeing a bigger supply of cattle than packers had available in the spring. At this point, the 2016 spring-born calves are more numerous and carcass weights have begun to increase from the spring low. With deferred futures at a discount to the cash market, feedyards remain willing sellers of cattle now, without much ability to push prices higher (see third page).
The June 1st Cattle on Feed Report last Friday casts a slightly bearish tone as the number placed on feed in May was 112% of May a year ago, compared to expectations of 110%. May marketings matched expectations at 109% of a year ago.
We saw two noteworthy announcements last week. USDA Secretary Sonny Perdue halted imports of fresh beef from Brazil, citing persistent safety concerns since imports from that country resumed in March: 11% of Brazilian fresh imports were rejected at our border by the Food Safety Inspection Service, compared to 1% of all others combined. Also, Brazilian-owned JBS 5 Rivers Cattle Feeding LLC is for sale. The “5 Rivers” feedyards combined one-time capacity makes it the largest cattle feeder in the U.S.
Spot market beef values turned sharply lower as the tide shifted, no surprise in view of the cutout prices near all-time highs just two weeks ago. With packers still enjoying very wide profit margins and pushing input costs (fed cattle price) quickly lower again, they won’t fight to hold prices higher. Volume movement is now their top goal, but beef buyers know that and have pushed back on price, covering only immediate needs as they ride the market lower.
Urner Barry market data shows the biggest declines in CAB cutout on the rib primal, well justified considering the huge premium ribs had seen lately. Those ribeye rolls moved up from a winter low of $6.62/lb. at wholesale in February to $10.77/lb. the second week in June, a 63% increase and a tremendous rally. Loins followed lower, the middle meats fading after peak buying season for the grill, though top butts and tri-tips held their ground. Not to diminish the end cuts, there were just modest price reductions last week on chuck and round items with inside rounds the only item in the end cut portfolio to see price increases. CAB grinds are still strong but off the mid-May peak. Fresh 50% lean trim fell dramatically, from $1.99/lb. in mid-May to last week’s $1.21/lb. Availability of cattle and those finished to a more appropriate end point surely assisted in the price decline.
Packers Regain Upper Hand
As we head quickly toward July, it’s a good time to review seasonal price trends for beef and cattle. There will be no “hot tips” here as the simple 5-year annual trends, except for the supply shock of 2014, quickly show that July spells a softer market for live cattle and boxed beef. Those not dialed in to the 2017 fundamentals may point to the wonderful price run-up sellers enjoyed from April to mid-June, proclaiming demand is king and that the market decline will be mitigated. But opportunities brought about by an imbalance in cattle supply and beef demand through much of the first half took much slack out of that rope.
We now move toward the “dog days” of summer, almost always tough times for demand, with plenty of cattle to push through the system. CattleFax CEO Randy Blach said last week that our total steer and heifer packing plant utilization is up to 99% of capacity in 2017. That developed through a number of plant closures in recent years, another expansion year with fedcattle numbers up 6%, and exacerbated by constant labor challenges faced by those firms when operating at full production. The net result is an almost overnight shift of leverage from feeders to packers, as spring officially turned to summer. The seasonal trend for a lower fed cattle market is in place and will likely work hand in hand with currently very-comfortable packer profit margins to see beef values slide into late July and possibly further out on the calendar.