Beef Wrap August 19
Cash cattle prices advanced again this week, gaining $2.37 to
average $146.76. As usual, prices in the North were reported
several dollars over the South, which traded in the $141-142
range. While packers’ cattle cost was rising, the price they got
for their beef was not. The Choice cutout gained a paltry $0.45/
cwt and the Select cutout was up only $0.30/cwt. That means
packer margins compressed further, now estimated near $197/
head. When this week’s more expensive cattle show up at the
packing plant, margins are likely to fall below $150/head. There
have been some rumblings about packers cutting the kill in order
to protect their margins, but so far we haven’t seen a concerted
effort to do that.
This week’s fed steer and heifer slaughter registered 517k, up 12k
from last week, but still below the 525-530k that the flow model
suggests. The biggest surprise in this week’s production data
was carcass weights, where steer weights came in 2 pounds
lower than the week before. The normal seasonal pattern in
carcass weights would have them increasing about 3 pounds per
week at this time of year, yet we saw weights actually decline.
The DTDS weights, which were already at very low levels, moved
even lower. This information makes a strong case that feedyards
are very current and thus in no hurry to market cattle. Packers
will be busy delivering on Labor Day orders over the next couple
of weeks and thus I think that cutting the kill is not something they
would do in a big way until after those orders have been satisfied.
Thus, cattle feeders seem to have packers over a barrel right now
and are extracting higher cattle prices as a result. Cattle feeding
margins have improved a lot lately, going from -154/head in the
middle of July to -38/head this week. It seems to me that, with
feedyards very current and packers reluctant to cut kills as they
are delivering on Labor Day orders, there is a good chance that
cattle prices will rise for at least a couple more weeks. After that
however, Labor Day week will be upon us and that provides
packers with a natural excuse to scale back the kill. The
presence of the holiday on a Monday is likely to cause the kill to
be suppressed in 2 consecutive weeks since packers will likely
give workers the Saturday heading into Labor Day off. My guess
is the steer and heifer slaughter for the 2 weeks around Labor
Day will average close to 480k each.
When packers get back to full kills in September, the flow model
suggest that they should be able to find enough cattle to kill
530k each week through the balance of September and into
October. It is that post-Labor Day timeframe when the best
opportunity will exist for packers to pull back hard on the kill and
thus increase the odds that they can stop the rising cash cattle
market. In the beef market, after Labor Day we should see
better interest in end meats as the weather cools down some in
the northern tier states and by the end of September buyers
should be actively working on packages for the end-of-year
holidays that will focus on the middle meats.
They will want Choice of better product to fill that need and that
is something that is pretty tight right now. This week the ChoiceSelect spread averaged over $26/cwt and packers were paying
an average of $20/cwt over that for cattle that will grade Prime.
Clearly, the supply of high quality beef is low relative to demand
right now. Look for the Choice-Select spread to remain wider
than normal for the next several months until all of the holiday
business is wrapped up. The combined margin worked lower
again this week, but the decline was small. There just isn’t much
movement in the cutouts lately and that seems to be keeping
prices in other areas of the beef complex from moving very
much. About the only place that we are seeing significant price
movement is in the cash cattle market. There wasn’t much
notable in the export data that was released this week.
China continues to be the number 3 destination for US beef,
behind Japan and S. Korea. Domestic beef demand appears to
be in a very slow moving downcycle while international beef
demand appears to be holding steady. Today’s Cattle on Feed
report pegged placements during July up 1.8% from last year.
That was larger than the average trade guess and fourth month
in a row now where placements have been larger than
expected. We now have a pretty good handle on the feedyard
inventories that will fuel beef production through the end of 2022
and it looks like there is a strong chance that 2022 beef
production will be almost equal to 2021. Next week, expect the
cutouts to trade steady to slightly lower on some slippage in end
meat prices. Cash cattle are likely stronger again next week as
the upward momentum continues.
