SPOT FED CATTLE BIDS ARE A LEADING INDICATOR WHEREAS WHOLESALE BEEF PRICES ARE A LAGGING INDICATOR FOR LIVE CATTLE FUTURES:
From a Supply/Demand perspective, Packer’s Spot Fed cattle bids are a leading indicator whereas, Wholesale Beef pricing is a lagging indicator of Packer’s market attitudes. When Beef Packers buy Spot Fed Cattle, they usually have up to 10 days to pick up the animals from the feedlots but will not have wholesale beef ready to be shipped for at least an another 3 or 4 days after slaughter. However, sometimes when packers are, “Close to the Knife”, they will often pick up cattle the same day as purchased. Since most Beef Primal cuts are sealed in barrier bags, these fresh products can be held in the cooler inventory for 30 days or more before being shipping boxed products. A relatively small proportion of beef products are shipped loose in combo bins a few days after slaughter.
Most beef packers assess their Spot Cattle purchase costs and look at the margins when replacing the cooler inventory. Presently, fed cattle packers have paid higher Spot Fed cattle values that are not yet fully reflected in the wholesale beef markets to maintain present kill/cut margins. Thus, cattle packers will be under very strong pressures to push up wholesale beef prices. Time will tell if beef buyers will be willing buyers at the sharply higher wholesale beef prices that are starting to develop? We suspect, the very high beef prices over the past year, likely have damaged the demand for beef. Many grocery retailers have expanded their “Meat Cases Facing” with cheaper pork and broiler meats. It may take several quarters of cheaper beef prices to “Buy Back Beef Demand” for both Food Retailer’s Meat Cases and HRI users Menus.
Beef Packers have an imbalance between the days for the payout for Accounts Payable vs days before collecting from Accounts Receivable. Federal laws mandate packers must be bonded and pay for livestock within 24 hours; were as, meat buyers typically can pay for meat purchases within 7 to 10 days from delivery. Also, running a slaughter plant is a rather labor intensive operations with sizable direct and indirect labor costs.
When Cattle Packer’s plants are operating well below capacity, overhead allocation costs per animal converted surge. In recent years, the cattle sector has had excessive slaughter capacity relative to the supply of cattle. We have seen a few plants closures but we expect some additional plants will need to be closed to allow the remaining plants to operate at efficient capacities. See Steve Kay’s article on packing plant closures this year alone.