Beef Wrap September 23
It was another bad week for packers, with the cutouts tracking lower
and the cash cattle market moving higher. On a weekly average
basis, the Choice cutout lost $4.78/cwt. and the Select cutout was
down $7.07/cwt. Cash cattle averaged about $1.30/cwt. over last
week and packers bought a lot more animals than they did the week
before. Perhaps they are trying to get some inventory around them
so that they won’t have to pay up again next week. Obviously, their
margin took a hit this week, dropping almost $60/head from the
week before to average $129/head. Unless the cutouts can stage a
substantial rally next week, margins are likely to fall below $100/
head when this week’s more expensive cattle show up at the
slaughterhouse.
The futures market paid no attention to the fact that packers were
paying more for cash cattle and the most active Dec contract lost
almost $2.50/cwt. on the week. Cattle traders seemed to be more
focused on the possibility that the US will slip into a recession as a
result of the ongoing interest rate increases by the Federal Reserve,
who upped rates another 75 basis points this week. The stock
market had an awful week also and that can have a psychological
impact on consumers even before an official recession begins.
Traders see the beef cutouts falling day after day and the stock
market blaring warnings of and impending recession and that sends
them into selling mode. I think they are correct to sell the more
deferred issues, which have been supported at very high levels for
months now by the bull story of tightening cattle supplies in the
future. However, as this week showed, prices are not only
determined by supply. Demand has a lot to say about price levels
also and the bad news on the demand side is finally starting to get
more focus in the cattle market. This week, all of the primals were
lower, but the end meats led the way.
Even ground beef saw prices slip this week. End meats and grinds
are the items that should see the least demand slippage in hard
times, but instead we are seeing the opposite. Maybe that is an
indicator that the hard times haven’t really arrived yet. However, as
we move into Q4 and the weather cools, end meat demand should
improve, if only for a couple of months. The combined margin
continued lower this week after a brief head-fake a couple of weeks
ago and it looks as though this demand downcycle may have
another couple of weeks to go before we get the combined margin
back down to the zero line where it has bottomed in the last two
cycles. International demand continues to look ok based on the
weekly data out of FAS, but the USD is very strong right now and
may get even stronger, so that could eventually dampen demand
from overseas. On the positive side, we should only be couple of weeks away from the start of the holiday middle meat strength that
normally materializes in October and runs to the middle of
December, so that source of demand could be what comes to the
rescue and turns the cutouts and combined margin higher in early
October. One thing worth considering is just how much demand
has already come down from 2021 levels. The attached scatter
diagram for Q3, which is nearly complete now, shows per-capita
consumption about the same in 2021 and 2022, but the price level
in 2022 is way, way below 2021.
It is almost back on the regression line. I think that Q4 will look
similar (2022 close to the regression line) and that is how I get the
Choice cutout averaging $255/cwt. in Q4. That isn’t very much
above today’s level. This week’s fed kill came in a little below
expectations at 516k. However, as we move into October, fed
supplies should tighten up based on past placement patterns and
we could see fed kills in October drop into the 500-510k range, or
perhaps a little lower. So, if the holiday middle meat demand
doesn’t turn the cutouts higher by early October, there is a good
chance that smaller cattle supplies and thus smaller fed kills will
provide some price support. Today’s Cattle on Feed report
showed August feedyard placements up 0.5%, which was stronger
than the 2.5% decline that analysts were expecting. This is the
sixth time that has happened in the last seven months (chart
attached). Total on-feed inventories were reported to be about halfa-percent larger than last year also. So we are not going to run out
of cattle any time soon. This week, USDA gave us carcass weight
data for the week that included Labor Day and it showed steer
weights up a whopping 10 pounds from the week before. Some
increase in weights was expected due to the holiday, but a 10-
pound gain seems unusually strong.
That bumped the DTDS weights upward and while they are still
very low, they appear to be in recovery mode now. The percentage
of cattle grading Choice or better increased in this week’s data also.
Those two pieces of information have been the strongest evidence
for the supply-side bull case, but they could be losing some of their
luster now. I’m not ready to say that the cash cattle market is going
to fall apart because cattle feeders still seem to have a good bit of
leverage (as evidenced by this week’s cash price increase), but
maybe their grip on the cattle market is loosening just a bit. Next
week, it will be interesting to see how the futures reacts to the COF
report after all the selling that took place late this week. Also,
watch those outside markets also because today’s action made it
clear that traders are taking the potential for macro damage to beef
demand more seriously.
