Beef Wrap October 21
The cash cattle market surged higher this week, jumping $3/cwt. to
average just over $150. Packers were short on cattle due to having
purchased a rather light volume the week before. It also looks like
they are holding a relatively big forward book that they will need to
deliver on in the next few weeks, so that probably further motivated
them to increase their purchased cattle inventory. Packers also got
some lift out of the cutouts this week, with the Choice gaining $5.62/
cwt. and the Select adding $7.16/cwt. Interestingly, the biggest
gainer in the carcass this week was the chuck primal. That is
consistent with the normal seasonal pattern prior to the covid years
when end meats normally added value as the weather started to
cool. We also saw the Choice-Select spread remain firm, averaging
close to $30/cwt this week. The middle meats also finally started to
move higher, likely on buying in anticipation of the upcoming
holidays.
The cutout gains enabled packers to expand their margin out to $69/
head this week, up from $24 the week before. However, next week
those more expensive cattle will show up for slaughter, so packers
will need to keep beef prices moving higher in order to keep their
margin from shrinking once again. My guess is that they will be
successful in that, and the gains will be more focused on the middle
meats next week. This week’s forecast revisions now have the
Choice cutout moving just over $260, mostly on holiday rib demand,
by the middle of November and then stalling before moving lower in
December. There is some risk that the end meats will continue to
show more strength that I currently expect and that would increase
the odds that the cutout overshoots the forecast. In any case, I don’t
really look for packer margins to get much stronger than they are
right now. Cattle feeders seemed to realize that they had packers in
a bind this week and weren’t afraid to press them until they got a
strong increase in cash cattle prices.
Feedyards are still relatively current and packers seem to be
insistent on keeping the kill larger than what the cattle supply can
comfortably support, so cattle feeders have been able to retain the
upper hand. This week’s fed kill is estimated at 520k, up 8k from the
week before and about 25k more than what our flow model
suggested should be available for slaughter. That has perhaps been
the biggest mystery in the complex this fall—Why are packers
slaughtering so aggressively? It may be partly related to them
carrying a strong forward book that they need to deliver on. Some
have suggested that they are having to slaughter a lot of cattle just to
find the ones that will grade well. I think that as we move beyond the
pandemic, the market is returning back to “normal” where cattle
supplies are roughly in line with slaughter capacity and thus packers
are having to compete harder now than anytime since the Tyson
plant fire three years ago.
This could go on for several months and will likely result in small
packer margins while it is in progress. At some point however,
packers will implicitly recognize that this strategy of maintaining
market share isn’t working for anyone (except the cattle feeders)
and then we will see them slowly back off the kill more or less in
unison. It has been a long time since packers have needed to alter
slaughter levels to manage their margins, so perhaps they are a
little rusty at it. One thing that could speed the process is if beef
demand falters. At the moment, packers are being saved by the
fact that beef demand is turning seasonally higher and that gives
them some cover to pay up for cattle. Note that the combined
margin appears to have bottomed this last week and is now moving
higher. That is a sign of stronger demand.
If demand should suddenly soften, and that could easily happen
given the storm clouds in the macroeconomy, then packer margins
could quickly go red and thus add a sense of urgency to correcting
their over-killing ways. Cattle feeders, for their part, really need
packers to keep pulling hard on the cattle supply because weights
are still trending higher and cattle are performing well. If the
packers’ demand for cattle softens once they get their booked
orders filled then that creates a risk feedyard currentness will fall
rapidly. Today’s Cattle on Feed report put September feedyard
placements down 3.8% and was right in line with the pre-report
estimate, so it should have very little impact on the futures next
week. Still, on-feed inventories are only 1% smaller than last year,
so it isn’t like we are running out of cattle and cattle feeders would
be wise not to expect cash cattle prices to keep going up week after
week. In fact, cattle prices are likely to take a bit of a breather next
week after this week’s sharp increase.
Steer weights increased 3 pounds this week and still probably have
another 6-7 pounds to go before they reach the seasonal top. The
DTDS weights are still pointing to relatively current feedyards. The
weekly export data continues to look encouraging and is not yet
showing any serious problems in international beef demand that
might arise at some point due to a very strong US dollar and
deteriorating economic conditions in the destination countries.
Next week, look for more cutout gains, with the middle meats
moving into the driver’s seat. Cash cattle might gain a little more
also, but not like they did this week. Without a red hot cash market,
futures could retrace some of the strong rally from this week. They
would all be better off if they all slowed down they kill in unison, but
at this early stage in the process they are keen on maintaining their
market share and all are hoping that their competitor will reduce
their slaughter level so that they don’t have to.
