Beef Wrap July 15
Packers continued to push the cash cattle market lower this week, with
the weekly average through Thursday at $141.94, down about $2.50
from last week’s average. At the same time, they were successful in
holding the cutouts mostly steady as production ramped back up
following the holiday. Through Thursday, the Choice cutout was up
$0.69 and the Select was $0.28 higher. Good thing that packers
have the cash cattle market on a downward trajectory now, because it
doesn’t feel like the cutouts are going to be able to hold at current
levels now that we are back in a high production environment. I’m
actually a little surprised that the cutouts held up so well this week, but
certainly expect them to give up more ground next week. This week
the loins did most of the work in holding the cutout up, but that is
unlikely to persist. The normal seasonal pattern is for the loin primal to
trend steadily lower from now through October.
In the next couple of weeks, the middle of the country will experience
some brutally hot weather and that seems likely to curb demand, but it
also could cause animals to eat less and gain less, so while the
demand impact of the heat event is probably negative to price, the
supply effect could be positive to price, but with more of a lag.
Hopefully, this next heat wave won’t cause thousands of cattle to die in
feedyards like the one earlier this summer did. Packers have been
aggressive with the kills going back to last Saturday and we even saw
100,000-head steer and heifer kill on Tuesday. I’m projecting the
weekly total to come in around 535,000 head, which would be about
10,000 head more than what they were killing just prior to the holiday.
Next week could be even larger. The nation’s feedyards are full and
packers are eager to keep their newly replenished workforce engaged.
Retailers should be fully replenished now after the holiday and I
suspect that if the fed kill next week is bigger than this week, there will
be ample availability and wholesale price levels will need to adjust
lower in order to clear all of the product.
USDA reported retail prices for June this week and we saw the
average retail price fall from $767.50 cents/lb in May to 766.00 cents/lb
in June. That is a very tiny decline and for all practical purposes we
can surmise that retailers are not really lowering beef prices at all.
Apparently, they will need to see more downward movement in the
cutouts before they feel comfortable lowering their retail prices. What
this means is that consumers will be asked to consume larger
quantities of beef in July than they did a couple of months ago at prices
that are very similar. I suspect that consumers will balk at that and
thus retail movement will slow, causing retailers to slow down orders
into the wholesale market. That, in turn, should cause the cutouts to
move lower and thus provide the green light for retailers to lower
consumer-facing prices. The whole process could take a couple of
months to play out. One interesting feature of the current market is the
very wide spread between Choice and Select.
The spread averaged close to $24/cwt this week, where historically
something closer to $10/cwt would be more typical for this time of
year. We saw a similar thing back in the summer of 2019, where the
Ch-Se spread traded in the low $20s from early July through
November. A wide spread is normally indicative of strong demand
for middle meat and we typically see wide spreads in the spring as
grilling season approaches and in November ahead of the year-end
holidays. This wide spread however, might be more of a supply
issue as high corn prices and rapidly falling carcass weights this
spring and summer caused the grade to decline. That attached chart
shows that currently the percentage of product grading Choice or
better is below the level seen in both 2020 and 2021.
We saw a rapid decline in the de-trended and de-seasonalized
carcass weights over the past couple of months and that points to a
rapid rise in currentness. Along with that normally comes a drop in
the grade. Back in 2019, the amount of product grading Choice or
better was about 2% below where it is today and it stayed relatively
constant (didn’t expand) for most of the rest of the year. Of course,
many producers are compensated on a grid-type system that values
their cattle on the basis of many quality attributes, and when the
Choice-Select spread is wide, those grids typically increase the
premium paid for cattle that grade Choice. To get cattle to grade well
they need to spend more days on feed and with packers killing at
such a strong clip, that might not be an option. Further, the heat
wave that is coming will have a negative impact on how cattle grade.
So, we may be stuck with a stronger-than-normal Choice-Select
spread for at least a couple more months. On the macro front, the
equity markets had another terrible week and talk of an impending
recession is growing. Neither of those things are helpful to beef
demand.
The US dollar has also strengthened considerably and that raises
concerns about beef exports in the second half of 2022. So far, we
haven’t seen much evidence of a slow down in international demand,
but that could be a feature in the market when fall arrives. For now, I
still look for the cutouts and cash cattle prices to work lower between
now and Labor Day. Forecasts have been raised a little recently to
account for firmness in the prices during early July, but I still have the
Choice cutout pulling back to around $245 just after Labor Day. The
risk to that forecast lies to the upside given that the Choice cutout has
been holding in the $260-270 range for the past nine weeks. Next
week, watch the weather forecasts for indications of hot weather
throughout cattle feeding country. If it gets abnormally hot for an
extended period of time that might provide cattle feeders with enough
leverage to slow down or stall the decline in the cash cattle market.
