Beef Wrap July 22
The cash cattle market continued lower this week, averaging
$140.65, which was about $1.50 below last week’s average. The
large premium that Northern cattle have been carrying over those in
the South is starting to narrow. The cutouts were slightly higher
with the Choice gaining $1.63/cwt and the Select up $0.30/cwt on a
weekly average basis. Although the cutouts averaged a little higher
on the week, they started to exhibit some softening near the end of
the week that may carry over into next week. Middle meats were
the primary gainers this week, but those gains were rather small
and could easily reverse in the near term. Packers aren’t
displaying a lot of confidence in the cutouts since they seemed to
pull back on the kill near the end of the week. Steer and heifer
slaughter only totaled 522k, which was about 15k below what the
flow model projected. If they continue to under-kill for a couple
more weeks, it would likely put them in a much better margin
situation and help keep the cash cattle market trending lower.
I calculate packer margins this week at $230/head, which is largely
the result of packers getting cattle bought cheaper last week. The
blended cutout has held in the $260-265 range now for over two
months and has been remarkably stable all year long. I suspect
that it will move lower through August and into September as macro
factors and high retail beef prices work to curtail consumption.
There is a lot of beef in the production pipeline and if off-take slows
just a little, it could cause a back-up. Retailers don’t seem to have
much interest in lowering the retail prices that consumers see and
who could blame them since wholesale prices (i.e., the cutouts)
have been remarkably stable. The combined margin chart has
shown a little uptick recently, but I’m not convinced that it is the
start of a new demand upcycle. I think it is going to turn out to be a
head-fake and soon the combined margin will be moving lower
once again.
There has been a lot of hot weather in the Southern Plains lately
and there is probably more to come, so that remains a risk to the
forecast. Cattle don’t eat as well when it is hot like this and thus
they don’t gain well either. Steer carcass weights were seven
pounds higher in the data that was released this week, but that data
was for the week of July 4, so that probably skewed weights toward
the heavy side. Still, carcass weights are now solidly in a seasonal
up trend that should last through October. Corn futures have fallen
dramatically in the last few weeks, with the Dec22 futures dropping
from a peak near $7.50/bushel back in early May to nearly $5.60/
bushel today.
That almost $2 drop could be huge for cattle feeding margins,
but most feeders are not seeing nearly that much benefit. Cash
corn remains very firm in the cattle feeding areas, with cash now
running $1.62/bushel over the futures in SW Kansas. Of course
now that the July corn futures have expired, corn is pricing off of
the new crop Sep futures. If the futures are correct about the
harvest being good, that would help to bring cash corn prices
down substantially once the new crop is harvested. The weather
has turned much more favorable for pollination in the Corn Belt
and that is what the big decline in the corn futures has been
about. USDA released its Cattle on Feed report today and it
showed placements during June down only 2.4% YOY. The
trade had been expecting a 5.3% decline. So, we have yet
another month where placements were stronger than expected
The mid-year cattle inventory report was also released today
and it showed the beef cow herd down 2.4% YOY, which was
less than the 2.8% decline that analysts were expecting. More
importantly, USDA estimated the 2022 calf crop to be down only
1.4%, not the 2% that the trade was looking for. So, both of
today’s reports were bearish from a supply perspective. Maybe
that will help quell some of the bullish enthusiasm that the
futures have been displaying lately. Oct futures gained almost
$3.50/cwt this week without much supportive fundamental news.
My guess is that traders will start working to remove some of
that next week. The focus will now shift to the cutouts and their
direction.
We are still in the dog days of summer and demand risk exists
over the next 5-6 weeks. USDA also released its Cold Storage
report today and that showed total beef in cold storage up 29%
YOY, but down about 2% from last month. Cold storage stocks
are not a very big price-influencing factor for beef. Next week, it
will be important to watch the kill for further signs that packers
are throttling back because they sense that demand is softening.
That would be bad news for the futures since any kill slowdown
could further accelerate the decline in cash cattle prices. It
would be a real feat if beef demand can hold steady or increase
between now and Labor Day, but I expect that soon the beef will
start to trend lower.
