Beef Wraps

This week is normally one where the Choice ribs shine and they
didn’t disappoint, with the Choice rib primal gaining almost $34/cwt.
That is the good news. Perhaps the only good news, because even
that huge gain in the ribs was not enough to keep the Choice cutout
from averaging $0.62/cwt. below last week. Further, the Select
cutout lost a whopping $7.99/cwt. this week. Why couldn’t that big
gain in the ribs move the Choice cutout higher? Because the end
cuts were all moving lower at a good clip. The chuck primal lost
$7.35, the round primal lost $5.55 and the brisket lost $4.78. Taken
together, those losses were more than enough to cancel the strength
in the rib. While the beef market was falling apart, packers were out
in the country paying steady-to-higher money for cash cattle. The
weekly average price for live cattle sales was almost dead-on with
last week, but dressed prices were close to $4/higher. Packers
probably paid more for the dressed cattle in the north because they
are searching hard for cattle that will grade Choice or better in order
to fill middle meat orders for the holidays. Cattle sold on a dressed
basis are usually subject to premiums and discounts based on the
quality of the carcass they produce. Buying cattle that way allows
packers to be sure they are not going to be paying for something they
don’t receive. When they buy cattle live or “on the hoof”, the packer
bears the grading risk. Producers in the South prefer to sell their
cattle live because those animals typically don’t grade as well as the
English breed cattle from the Northern Plains.
Another reason that we see more dressed sales in the North is
because during winter feedyards in the North often get much more
muddy than those in the South and it is difficult to get an accurate
weigh-up when cattle are carrying a lot of mud. Carcass pricing
solves that problem. Speaking of problems, beef packers have a big
margin problem on their hands. I calculate this week’s packer margin
at -$36/head. Ribs have been the only support pillar in the cutout
recently and they are probably within days of posting huge price
declines as the holiday business gets wrapped up. That means
rapidly declining cutouts in the very near future and, unless they can
get cattle bought cheaper, increasingly negative packer margins.
However, with holiday sales wrapping up packers should have more
leeway to scale back the kill in order to slow the bleeding. We might
have gotten a hint of that in this week’s slaughter data which showed
the fed kill at only 506k. That is the smallest non-holiday fed kill since
early August. The Saturday kill was only 28k and about 10k of that is
likely cows. If packers are going to scale back on kills, then Saturday
is the most logical place to start. Packers have two more full kill
weeks before the Christmas and New Year’s holidays will force two
short kills. Normally, we might expect packers to try and produce a
big kills leading up to the holidays as a means of getting ahead on
production. I think it will be telling if they fail to make that effort this
year. Another clue that kills might be about to tighten up is that the
volume of cattle traded in the negotiated market this week was smaller than normal. 

Those volumes had been running 90-100k in recent weeks but it
looks like this week’s volume will be closer to 70k when all of the
data is reported on Monday. Steer weights dropped one pound in
this week’s data release, but next week’s data is for the week
including Thanksgiving, so it wouldn’t be surprising to see weights
hold steady or even rise a bit. The DTDS weights are now close to
zero, which suggests that a kill-cutting strategy might produce results
a lot quicker than if the DTDS weights were very low like they were
earlier in the year.
The demand side of the market looks awful at present. Take a look
at the combined margin chart. The combined margin went from +13
to -100 in a single week. $66 of that drop came from the packer side,
where packers went from +$30/head margin last week to -$36/head
this week. I was surprised to see the cattle feeding margin drop by
$48/head, so I looked to see what was driving that big drop and it
turns out that cattle feeders are now beginning to market animals
that were put on feed back in late June/early July and that is when
the price of feeder cattle jumped from the low $160s to the low
$170s. The current breakeven on cattle leaving the yards is around
$161/cwt. So, cattle feeders are not getting rich off of $155 cash
cattle. And, to make matters worse, cash feeder cattle prices jumped
from the low $170s in early July to the low $180s in August. That
means in another month or so feedyards will be marketing cattle that
carry a breakeven close to $170/cwt. Their hope for a positive
margin in the next few months is very slim. Packers losing money,
feeders losing money, what is wrong with this supply chain? Well,
right now the folks at the ends of the supply chain are taking what
little profit there is to be had in beef. That would be the cow-calf
producers and the retailers. Probably the lion’s share of that is going
to retailers. I have said before that retailers have been very reluctant
to lower beef prices and that will slow movement and cause all kinds
of problems for the participants above them in the supply chain. That
seems to be what is happening now. Further exacerbating the
problem is that consumer demand in general is softening. When
consumer demand surges like it did in 2021, margins all up and
down the supply chain can expand, but when consumer demand
retrenches, margins will compress all up and down the supply chain.
Right now the packers and feeders are feeling it most acutely, but
the retailers will get their time in the barrel too. It probably sounds
like the beef supply chain is a bit out of whack right now. Cattle
feeders seem oblivious to it, and continue to try and press cash cattle
prices higher each week. Given their high breakevens, who can
blame them? The moment of truth is upon us and it is likely to be
triggered by the ribs breaking sharply lower in the next few weeks
and carrying the cutouts with them. It will be interesting to see how
the various players react to that development. Next week, watch the
rib primal pricing—it is at an important juncture. As always, keep an
eye on the weather for potential winter storms causing problems in
the middle section of the country.