Beef Wrap July 29
The cash cattle market averaged almost $2 lower this week at
close to $139, with trades in the South as low as $135 and prices in
the North falling mostly in the $141-142 range. The cutouts were
also slightly lower, with the Choice dropping $1.26/cwt on the week
and the Select down $0.42/cwt. The beef trade was a choppy mix,
with price strength evident at the beginning and end of the week,
but softer during the middle of the week. This week the ribs
provided most of the cutout’s support, while the other primals all
sank a little lower. One thing that I have noticed over the past few
months is that the volatility in the beef cutout has been very low.
The attached chart gives the 10-week rolling standard deviation for
the Choice cutout value since the beginning of last year. Since
about mid-March of 2022, this measure of volatility has been in
steady decline and now is at its lowest level in years.
The cutout just doesn’t seem to move much anymore. If we go
back to the middle of March, the Choice cutout averaged $266/cwt
and this week it averaged a little over $268/cwt. The highest
weekly average recorded during that stretch was $272 and the
lowest was $257. That amounts to 18 weeks where the cutout has
traded in a very narrow range. Are packers doing something
differently that has stabilized the cutout? Possibly, but I’m not sure
what that would be. If the cutout doesn’t move much, then that
suggests that cash cattle prices don’t really need to move much,
which could be one reason why open interest in live cattle futures
has dropped so much over the past couple of months. Speculators
thrive on volatility and when they can’t find it in one market, they will
switch to another. Further, the other market participants, hedgers,
don’t feel an urgency to take on hedge positions whenever prices
aren’t moving much.
It is also worth noting that retail beef prices haven’t moved much
since March either. I’m not really sure what to make of this, but it
does make me wonder if I’m going to get burned by forecasting the
Choice cutout down to $245 this fall. Maybe it will just stay in its
$255-270 range. In order to get down to a $245 Choice cutout by
October, it will be necessary to see some demand softening. The
combined margin continued upward this week, but at a little slower
pace than in previous weeks. Perhaps it is ready to make a top and
turn lower. That would likely push cutout values down unless
packers cut the kill to compensate for softer demand. It is likely that
we will see some middle meat interest during the middle of August
as retailers prep for Labor Day. We may also see interest in end
meats and grinds from institutional buyers as US schools start to
re-open during August.
I have to balance those normal seasonal factors against the rather
bleak macro picture where inflation is still raging and the economy
appears to be cooling. It’s not surprising that US consumers kept
spending during the summer of 2022 since they were very eager
to travel and do things that the pandemic hindered. But now we
are moving into the waning weeks of summer and demand
continues to be strong. On the supply side of the market, this
week’s steer and heifer slaughter came in at 521k, which was a
little below the 530k that the flow model projected. This marks the
third week in a row where packers under-killed our model and that
may be playing a role in their ability to keep stepping cattle prices
lower each week.
Past placement patterns suggest that there should be sufficient
cattle available in August for 530k weekly fed kills, but whether or
not packers will keep slaughter that high is an open question.
There is more brutally hot weather in the forecast for cattle
country in the next couple of weeks and that has the potential to
slow weight gains some and perhaps slow down the loss of
leverage by cattle feeders. Steer carcass weights were reported
down one pound this week and are now almost dead-on with last
year’s level. The seasonal uptrend in weights is expected to
continue unabated by the hot weather that is coming. Corn
prices are on the rebound now and that might help to temper
weight gains, but won’t be enough to disrupt the seasonal pattern.
For the first half of 2022, placements were almost equal to the first
six months of 2021 (actually 0.2% higher).
That seems somewhat odd for a herd that has been getting
smaller every year since 2019. It also suggests that placements
in the second half of 2022 will need to be below last year in
aggregate. Mother Nature will have a lot to say about that
though. If the drought persists in grazing areas, we will likely
continue to see a lot of feeder cattle pushed into feedyards
because there is insufficient forage for them. The beef export
data continues to look good, keeping pace with last year and still
registering strong Chinese interest in US beef. Next week, look
for some softening in middle meat prices to take a few more
dollars off of the cutouts. Cash cattle prices should also continue
to soften due to fed kills failing to meet expectations over the past
few weeks. It looks like the price action in the cattle and beef
complex has the potential to be rather boring for the next few
weeks.
