Beef Wrap September 16
The cash cattle market was essentially steady this week, averaging
$142.79, up $0.31 from last week. Prices in the North were steady
to slightly lower and prices in the South were steady to slightly
higher. The price gap between the North and South has narrowed
to the point where it isn’t much of an issue anymore. The bad news
for packers was that while they were out there paying steady
money for cattle, the value of their beef was moving lower. The
Choice cutout dropped $4.51/cwt to average $254.76 on the week
and the Select dropped $5.69 to $231.71. Packer margins
dropped about $25/head to $170 and if I’m correct about the beef
slipping further next week, then we could see packer margins drop
into the low $100s. It was a little bit disturbing to see the beef
market struggle so much coming off a short kill the week before
and that probably says something about the near-term prospects
for beef demand.
This week’s fed kill was close to 520k, down from the 533k that
packers were killing just before the holiday weeks. Maybe they
sensed that they need to dial it back a bit to relieve some of the
supply pressure on the beef market. Soon they will be forced to
dial it back even more because market-ready numbers of steers
and heifers in October are expected to be in the 500-510k range.
Users should be actively covering their needs right now while price
levels are sagging in anticipation of a rebound in beef prices during
October. The cattle market could also see some additional
strength in October too. Cattle carcass weights continue to tell a
story of very current feedyards and the grading also points in that
direction. A couple more weeks of strong kills and by October the
cattle feeders should have enough leverage to advance the cattle
market. Packers will be hoping that the gains in the beef are strong
enough to pay for those more expensive cattle without crushing
their margin.
Last week, I was concerned that the small uptick in the combined
margin was a head fake and sure enough, the combined margin
turned back lower this week. If the last two demand cycles are any
guide, the combined margin needs to get back near zero before a
new upcycle will begin. So, I’m calling the cutouts softer over the
next two weeks to accomplish that objective and then I expect them
start marching higher. Speaking of demand, it is important to note
that this week I completely reformulated the demand index
calculation to take into account the impact of inflation. I was
concerned that the presence of such high inflation in the economy
was clouding my ability to accurately gauge beef demand, so I now
calculate the demand indexes using deflated prices (deflated by the
Consumer Price Index).
Back when inflation was consistently running 1-2% per year, it
wasn’t a big deal to calculate the indexes with unadjusted prices
and I think analysts tended to avoid using deflated prices where
possible because it just introduces another source of error when
attempting to forecast, because that would require a forecast of the
CPI in order to arrive at a future price level. However, in a 8-9%
inflation environment, ignoring inflation can lead to undershooting
on price forecasts by a significant margin. In the case of the beef
market, this change helped me to more clearly see that most, if not
all, of the demand boost from the pandemic has already come out
of beef prices. The attached chart shows the updated demand
indexes by quarter and it is clear that after experiencing a bubble
in 2021, they are now back down near pre-pandemic levels (and
have been for the last 2 quarters). This has led me to stop looking
for further big downward corrections in demand based on the
easing of the pandemic.
That has already happened. However, demand could still suffer
due to adverse macroeconomic conditions, so I’m not saying that
demand can’t get worse from here. Equity markets sold off hard
again this week and more indicators are starting to emerge that
suggest a global slowdown is not far around the corner. So, we
are not out of the demand “woods” yet. I’ve also attached a chart
of quarterly CPI so that you can get a sense of what my CPI
forecast looks like. This is impounded in the beef demand
indexes now, so if I’m really wrong on the CPI, it has the potential
to make the demand forecast really wrong also. One negative
factor that cropped up this week was the weekly export data. It
looked pretty weak relative to what we had been seeing over the
summer.
Recall that USDA took a 4-week break in reporting the data while
they straightened out their system problems. Now that we aren’t in
the dark anymore, it looks like international demand for US beef
has been softening during the intervening period. However, I get
nervous about data integrity whenever USDA’s systems are acting
up, so I don’t want to place too much emphasis on this right now.
Let’s see how the next few weeks’ worth of export data come in.
Next week, look for the cutouts to drift a little lower and packers
possibly to take a little off of the cash cattle market. The fed kill
should be close to even with this week and maybe a little larger.
Buyers should be busy working on their holiday needs.
