Beef fundamentals turning murky

Before the bird flu story hit and sent cattle futures sharply lower the beef fundamentals seemed rather easy; they were bullish. Supplies were tight and demand was good. Everything changed in March and April.

The bird flu story fueled panic and triggered aggressive selling which was enhanced by the huge daily range of trade allowed by the CME. Then it was discovered that record heavy cattle weights were also having a bearish impact on the market. Weights were noted rising in contra-seasonal fashion, eventually reaching record levels. Indeed, beef production during April exceeded last year due to record heavy weights.

The third bearish item then surfaced. Evidence has surfaced that consumer behavior is changing due to prolonged exposure to inflation. Consumers are switching down, going from choice beef to select, going from beef to pork and chicken and buying smaller quantities of everything at the grocery store as inflation bites hard. Inflation at fast food chains is slowing traffic here as well. Companies all along the food chain are reporting reduced profits due to changing consumer behavior. With retail beef prices record high, this presents a major problem moving forward.

The other bearish development further clouding the bullish outlook for beef and cattle prices is the onset of a trade war with China. Several weeks ago, the Biden administration slapped a new round of tariffs on China, mostly aimed at EV car production. This week, China seemed to respond by slapping a ban on beef from the JBS beef plant in Greeley, Colorado. At the same time the Chinese relisted five beef plants in Australia that had been delisted in 2022. The Chinese are ready to fight fire with fire and in this case it’s the U.S. beef producer that is at risk of loss. I’m expecting additional beef plants to be delisted in the days ahead. The U.S. beef market needs Chinese beef exports. Beef exports to China/Hong Kong make up nearly 25% of total exports. Losing this market will limit the upside potential of the bull live cattle market.

U.S. beef exports are trending lower but that’s mostly due to tight supplies and high prices. So, lower exports are a normal response. If exports get hit due to trade war actions, the upside potential of the bull market into next year will be reduced.

Make no mistake that the beef fundamentals remain long term bullish. Look for placements to continue to drop off and by late in the third quarter on-feed inventory will be substantially lower than year ago levels. At some point this summer the supply of heavy weight cattle will be dead and gone. Lower trending placements combined with reduced average dressed weights will ratchet down beef production. As the leverage shifts in favor of the feedlot and away from the packer, higher to sharply higher cash steer prices are likely. A surge in cash steer prices late this year and into next is almost assured unless the wheels come off demand due to inflation. For months most of us feared that recession would cap off beef demand. There is no recession. But the persistent bout with inflation is certainly having a negative impact on beef demand.

Globally, there’s solid evidence that every major beef exporting country has been culling their herd. Should most of these countries then decide to begin retaining heifers at some point next year, global beef production would drop off hard, driving beef prices and cattle prices sharply higher. But how will the consumer deal with sharply higher prices?

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