Flat, fuzzy and frustrating are seemingly appropriate descriptors for the fed cattle market during the first half of 2013. For a variety of reasons, weekly negotiations throughout the spring simply couldn’t shake free from an overriding sideways-to-softer tone to the market. Persistent ambiguity around fundamental price drivers resulted in hesitancy from both sides of the trade to make a stand one way or the other.
That ultimately resulted in somewhat of a sloppy, non-directional price trend through June. As such, last month’s column noted that cattle market action during the summer would be critically important to providing some direction. The hope being that the market would begin to assume more of a typical seasonal pattern, along with facilitating some normalcy around both beef and cattle movement. And IF (big emphasis!) that could occur coming out of July and August, perhaps then price signals would solidify running into the fall.
Also noted in July, based upon the previous two years of price action, prospects for summer lows would be somewhere around $190 for the Choice cutout based on a typical break of $20 from the spring high ($210). The fed cattle market would likely post a low in the $115 range, also based on cash action the previous couple of years along with consideration of typical basis patterns and general trade around the August live cattle contract at the CME.
Since that time, the cutout has followed a distinct seasonal pattern. Choice boxed-beef sales traded down to $186-7 in late July, and daily price action is providing some indication of support near those levels. Meanwhile, fed cattle trade has stubbornly refused to yield to seasonal expectations, trading $119-121 during the past month (Figure 1).
Therein enters the yin and yang that will likely occur over the next several weeks. The packer has managed, since mid-May, to string together two consecutive months of favorable processing margins. However, weaker wholesale values coupled with a steady fed market ended that run in late-July. Beef processors are clearly hoping for a rebound in cutout values in the run-up to Labor Day and will work hard to keep fed cattle prices in check.
Meanwhile, the cattle feeder recognizes that beef prices have likely bottomed and should begin to turn positive. Additionally, looking beyond the cusp of August, the CME October contract is providing a favorable premium and will thus draw supply out of summer into fall. As such, feedyards have incentive to hang tough for the next month. That will likely limit downside risk to the fed market and protect against any sharp or sudden break in the coming weeks.
Food industry perspective
All that said, given the back and forth here, both sides have some work ahead of them. August will likely witness some active positioning by both packers and feeders from week-to-week to ensure they’re on the right side of the trade. Hopefully, sifting through all that in the weeks ahead, though, will provide some clearer cut direction once we transition beyond Labor Day.
Turning our attention to demand and the broader economic perspective, July also represents the bulk of quarterly earnings reports from publicly traded companies. Reading through the pertinent transcripts to the food world, several items from the question/answer segment of the earnings calls (always the best part) caught my attention and are of particular interest to the beef industry.
The first item sources from Chipotle Mexican Grill’s July 18 earnings call, during which there was a question regarding Chipotle’s new product test offering in California of “Sofritas,” a tofu-based product to be included in the burrito or taco. The company noted the new product has garnered about 4-5% of the overall sales mix. As follow-up, there was a question regarding that influence within the trial stores.
John Hartung, Chipotle CFO, explained that sales growth surrounding Sofritas has largely NOT been incremental – that is, not resultant from sales promotion efforts. Rather, it’s largely been the result of spontaneous consumer decision-making at the store. Most interesting, though, is Hartung’s explanation of the swap consumers are making to include Sofritas: “…only half of the trade-off is coming from vegetarian, the other half is coming from some of our meat entrees, a lot of that’s coming from chicken.” In other words, for the bulk of consumers, tofu can trade with chicken, but beef is irreplaceable.
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The second item stems from McDonald’s earnings call on July 22. One of the analysts wanted to probe deeper in the company’s perception of the U.S. consumer. The analyst was concerned that perhaps the high-end consumer will leave for, or has shifted to, alternative formats and/or companies.
Don Thompson, McDonald’s president and CEO, countered that perception with the fact the company has actually gained market share along with a couple of other major competitors. Furthermore, the company is highly focused on performance in specific growth categories. Those include, “… chicken, beverages, breakfast, and then we also look at the premium beef category, which is why you saw it implement the Quarter Pounder line with the three different recipes…” Reading between the lines, he’s saying that beef – not chicken – serves as the foundation to achieve sales growth going forward and thus warrants the company’s recent major promotional push.
There are some better signals out there! Perhaps most important was July’s final consumer sentiment mark coming in at 85.1 (Figure 2) – the highest level in six years. Meanwhile, some consumer cyclical companies are showing signs of new life and better spending within some segments of the population. If that trend persists, that could be especially important to supporting beef prices in the fourthquarter.
However, also remember that consumers are always fickle. And many potential stumbling blocks remain. These include politics, monetary policy and a generally tepid economic recovery. So, as always, stay fully informed, and maintain objectivity around all aspects of the business.
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