In mid-December, we reviewed the huge year of 2017 export growth, not only for CAB but across all U.S. beef. As many know, demand for offal such as organs and oxtails helps drive export value, though never carrying the CAB brand label. That means CAB export success is solely based on premium whole-muscle cuts and a small amount of ground beef. We’ve previously highlighted the two largest export growth markets for 2017, Japan and Korea, our second- and fourth-largest volume international markets last year. What may come as a surprise is that 80% of the brand’s export volume sells to the top five destination countries. It shouldn’t be news that Canada and Mexico were No. 1 and 3 CAB export destinations; they don’t have the annual growth seen in Asia, but these trade partners have long been key stalwarts to CAB and U.S. beef exports alike, with Hong Kong rounding out the top 5 list.
Holding our ground and protecting our export position is vital in the two years ahead as our fed cattle supplies grow to the cycle peak and competing U.S. protein supplies become record large. Tariff headwinds are unfavorable to further U.S. growth in Japan as our product loses out to Australia and Canada due to the U.S. absence in the Trans Pacific Partnership. The Korean-U.S. Free Trade Agreement, however, presents further opportunity with the U.S. beef tariff in South Korea set to decline to 18.6% starting in 2019, and on a schedule to disappear by 2026. As well, CAB has had a great fiscal first quarter to start 2018 in Canada with foodservice sales growth leading the way. Trade regulations aside, quality CAB-licensed partners in these markets ultimately create the necessary in-roads to growth.
In the past three years, fed cattle prices declined from mid-January to short-term lows at month’s end, or as late as the 3rd week of February in 2017. The trend pointed to a similar February low this year, but live cattle remained in a tight range near $126/cwt. from the week of January 22nd through February 9th. This, on tighter fed cattle supplies and FEB Live Cattle futures gaining a net $5.81/cwt. from February 1st through last Friday’s trade. Supplies are tight enough now to incentivize packer competition in the spot market. However, packers bought a large number of cattle in the cash trade last week, some for delivery a few weeks out. Early analyst forecasts for steady to higher may be dampened if packers cut their harvest this week against tight margins, as expected.
The fed steer/heifer price as of last week was 8.4% higher than a year ago, while Urner Barry-reported Certified Angus Beef (CAB) cutout ($217.90/cwt.) and Choice cutout ($207.40/cwt.) were 7.4% and 7.6% higher than in 2017. Analysts fret that can be a disadvantage to retail February and March front-page features and packers struggle to secure the volume of forward sales (22+ days delivery) they enjoyed a year ago. The absence of a “buy” signal in cutout values so far in February could help explain why forward boxed-beef sales lag under larger carcass tonnage this quarter.
The slight easing of boxed beef prices last week was small enough to call unchanged. As carcass quality grades remain quite high with 72.5% Choice in the mix, the Choice/Select spread narrowed to $4.60/cwt. on Urner Barry, still $1.50/cwt. higher than a year ago. CAB qualified carcasses are likewise running high: the second week in January showed a 33.6% acceptance rate (98,000 head), second-highest weekly rate on record. Yet the CAB/Choice spread is 50¢ higher than a year ago at $10.50/cwt., bolstered by chuck item price spreads. Although round items advanced a couple of weeks ago, they retreated last week, peeled knuckles leading that with a 7¢ decline, wholesale. The chuck primal net $1.65/cwt. decline can be blamed partly on the chuck flap’s 22¢ plunge. Teres majors kept seasonally higher while flat irons may be near a short-term high before heading lower until the May-June run up.
Middles met firmer prices last week as buyers look ahead to warmer weather. Earlier rib demand now has those near $1/lb. higher than 2017, but strips are still almost 30¢ cheaper. Thin meats built higher on recent strength; grinds were steady with a week and year ago.
With fed cattle prices jumping up $3-$4/cwt. last week and packer margins narrowing, those firms have advanced the Choice cutout by $6/cwt. from Friday to this Tuesday.
Primed to Produce More
Prime carcass tonnage surged in early February as 8% of steer and heifer carcasses reached the grade. The spread between premium beef and Choice boxed beef normally narrows in the first quarter, based on lower middle-meat demand. With the supply surge only profound on a short-term basis, market uptake is difficult to quantify. A longer term, similar trend could equate to increased end-user utilization of Prime product given steadier supplies. Historical seasonal trends would normally see quality grades begin to decline as the older yearling cattle play out in the fed harvest. Prime premiums at the packer-feedlot transaction level remain strong at a $16/cwt. premium to Choice.