Beef Wrap October 29
The cash cattle market finally made a move higher this week, with live
prices registering in the $126-127 range. It looks like the average for
the week is going to be just about $2 higher than last week. We’ve
known for a while now that smaller placements back in May, June and
July would hit the market in Q4, and so that time has finally come.
However, there is more to it than just an tightening of the overall cattle
supply. Packers are aggressively seeking out cattle that will grade well
in order to fill orders as the holidays approach. Most of the cattle that
sold at the top of the market this week ($127) were high quality cattle.
The Plain Jane cattle were the ones that sold at $125-126. The volume
of trade was pretty strong, so perhaps packers won’t need to be as
aggressive next week.
The beef cutouts were higher, with the Choice adding $3.71 on a
weekly average basis and the Select up $0.69. Nearly all of the
primals posted gains, with the end meats doing better than expected
and the middle meats gaining a little less than expected. The rib
primal took an unexpected drop during the middle of the week but then
recovered as the week came to a close. I’m looking for rib prices to
move higher for the next 3-4 weeks and then start to soften some after
Thanksgiving. The end meats are also forecast higher over the next
few weeks, but the price appreciation is not as large as for the middles.
That gives me a Choice cutout forecast that tops out in the mid to high
$290s right around Thanksgiving. I’m still pretty nervous about that
forecast as I recognize the risk that the middles catch fire and drive the
cutout much higher than that. Beef production should be relatively
stable between now and Thanksgiving. This week’s fed kill came in at
520k, which was 5k greater than last week and a little above what the
flow model is projecting, so its likely that any backlogged cattle are now
getting cleaned up quickly.
That will help cattle feeders in their effort to raise cash prices, but after
November is done the expectation is that fed supplies will increase
again and thus some pressure could come back into cash cattle prices
before the end of the year. Packer margins expanded a little this week
as the cutouts rose while packers were killing last week’s cheaper
cattle. I have margins now at $757/head. I think margins will stay in
the $700-800 range through November as rising cutouts help to offset
modest increases in cash cattle prices. Steer weights were reported
one pound higher this week at 922 pounds. Weights will likely make a
top sometime in the next 2-3 weeks and then start to work lower until
April. The DTDS weights are rising, which doesn’t fit very well with the
narrative that cattle supplies are tightening, but maybe they are rising
because cattle feeders are finally able to shed those heavy cattle that
were delayed in Aug/Sep.
Regardless, we need to keep a close eye on those DTDS weights
because they are right about feedyard currentness more than they are
wrong. On the demand side, it is easy to conclude that demand has
finally stabilized and started to move higher once again. We’ve seen
that in the daily demand scatters over the past week or so and the
combined margin chart below is also putting in a bottom. The real
question is whether or not this next upcycle in demand explodes
higher like it did this summer or if it’s a more subdued (and more
typical) improvement in demand. Retailers now have cheaper pork
and broiler meat that they can feature since wholesale prices in both of
those sectors are coming down. That may temper beef demand some.
The best opportunity for retailers to promote beef comes in the first two
weeks of November because after that, retailers are heavily focused
on hams and turkeys in anticipation of Thanksgiving.
Beef usually comes back to the forefront after Thanksgiving as
consumers, now sick of turkey and ham, want something different. So
I think that Thanksgiving, with its pork and poultry focus, is going to act
somewhat like a speed bump for beef demand and thus keep it from
running wild to the upside. COVID infections continue to trend lower
in the US and that, along with the proximity to the holidays, suggests
more beef being consumed in foodservice settings and less at home.
We already have ample evidence that kind of shift is not good for
overall beef demand. Retailers have pushed the price of beef at retail
to all-time record highs and they are not likely to back those down
much, especially now that they can see wholesale markets rising
again. So, there are a lot of factors that suggest to me this upcycle in
beef demand won’t be as strong as the ones this spring and summer.
The futures market got excited this week by the higher cash trade, but
then pulled back some as the expiring Oct contract faced deliveries.
On Monday, Dec will become the nearby and will have to stand on its
own merits, without the benefit of a delivery period. Traders want to
be bullish cattle so bad it hurts, meanwhile corn futures are rallying
again and that has weighed on feeder cattle futures. Next week, watch
the primals, particularly the ribs, and keep an eye on those DTDS
weights. They might be trying to tell us something.
