Beef Wraps

Remain abreast of the cattle & beef markets with our weekly Beef Wraps written by J.S. Ferraro EVP, Research and Analysis, Dr. Rob Murphy.

Beef Wrap August 27

Cash cattle have only been lightly traded this week, with prices in
the South mostly $122-124 and prices in the North $3-4 over that.
Available supplies are tighter in the North and the cattle from that
region grade better, thus the higher price levels. Cattle feeders
have been struggling to capture even a small portion of the huge
margins that packers are making right now, but just can’t seem to
make that happen due to plant labor constraints restricting capacity.
They had better hurry up if they want to get it done, because the
cutouts appear poised to track lower in the next few weeks and
packers are not known for paying up for cattle when the cutouts are
falling at a big clip. The beef market feels really toppy up here. On
a weekly average basis, the Choice cutout was up $8.10 on the
week and the Select is up almost $6.41, but the gains have stalled in
recent days as last minute Labor Day buying was completed. There
are some cracks starting to appear in the beef market and my guess
is those will accelerate next week.

The 50s lost $16.72 on a weekly average basis and the daily prices
suggest that the 50s could lose $20 or more next week. Middle
meats once again provided support for the cutout, but unless a
buyer absolutely must have ribs or loin cuts at this moment, they
won’t be paying the super-high prices that USDA has printed in
recent days. I’d expect them to back away and let the middles drop
like a rock. The end meats were higher this week also, but there too
the daily prices suggest a downtrend in the making for next week.
This was the first week in quite a while where I didn’t feel like I
needed to drastically raise my beef price forecasts. In fact, I lowered
some of them. Of course, if the cutouts are in fact turning lower,
buyers will want to know how long that is likely to last. The blended
cutout chart below shows that once the last cycle topped, the
cutouts moved lower for the next seven weeks before bottoming.

If that repeats, it would put the bottom somewhere around the
second week of October. By then, holiday interest should be driving
the middles higher again and very likely the cutouts also. That
would be a relatively normal seasonal pattern, but if there is
anything 2021 has taught us is that normal seasonals don’t apply
this year. Thus, I’m going to ignore the seasonal and say that by
Oct/Nov demand will have faded somewhat and thus the cutouts will
be trading well below $300 right through the holidays.

That sounds like a pretty bold forecast given what we have been
through so far this year, but remember that high prices eventually
cure high prices and it seems like that cure is a bit overdue. I’m
looking for this week’s fed kill to be close to 510,000 head, with
packers upping the Saturday kill to make up for lost kill time due to
mechanical problems in some plants. The problem is that it will be
difficult for packers to make up ground over the next two weeks
because of the Labor Day holiday. Packers are likely to scale back
the kill next Friday and Saturday as a gift to employees on Labor
Day weekend. Then, of course all production will be lost on Labor
Day itself, the following Monday. So, the bottleneck in the packing
sector continues.

I’m not sure how cash cattle prices can advance much as long as
this stumbling block remains in place. Yes, packers will pay
premiums for the best grading cattle, and may pay more in the
North where numbers are tighter, but increasing cattle prices
substantially in the South is going to be a challenge, especially if
the cutouts are moving lower. On the demand side, we saw the
combined margin move higher again this week, reflecting strong
demand ahead of the holiday. It is interesting that the combined
margin is now almost exactly where it was earlier this summer
when the cutouts topped and turned lower. Maybe that is an
omen. Next week, watch the rib and loin primals for signs that
buyers are backing away. If that happens, the cutout will almost
certainly retreat and the market tone will move from bullish to
bearish pretty quickly.

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