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 July 16

Cash cattle prices were a little higher this week, averaging
$122.56, up about $0.40 from last week’s average. We still have a
two-tiered market, with cattle in the North selling for a couple of
dollars more than those in the South. The beef market continued
to move lower, with the Choice cutout dropping a little over $10
and the Select cutout off a little more than $5 on a weekly average
basis. In some respects, this week was just a repeat of what we’ve
seen over the past month or so—beef prices falling, cattle prices
steady and packer margins compressing after reaching absurd
levels this spring. I calculate margins this week at $467/head,
which is about $90/head lower than last week.

One has to wonder at what point packers will begin to feel the
need to pressure cattle prices. My guess is that won’t happen until
margins fall below $300. That is near the average margin packers
earned early in 2021 before the great beef price escalation began.
Of course, there is always the possibility that the cutouts don’t
move low enough to push margins below $300/head. My forecast
has one more week of substantial decline in the cutouts and then I
think that the rate of descent slows considerably. The chart below
indicates that it was primarily the loin primal that pushed the cutout
lower this week. Surprisingly, rib prices actually increased. I
continue to be concerned about the 50s, which finished today at
$129.11. While almost everything else has moved lower, 50s have
marched higher in recent weeks.

That makes me think that it is a supply issue, not demand, that is
moving the 50s higher. Carcass weights have been declining and
the DTDS is at -10. Further, early July saw restricted fed kills due
to the Independence Day holiday. So, those things could be
tightening up the 50s supply currently. However, last Saturday’s
kill was big and the daily kills so far this week have been solid, so I
would have expected some downward pressure on 50s, but
instead they moved higher. Maybe labor shortages in processing
plants are resulting in less trimming of cuts and therefore less fat
trim production. That seems reasonable, but we had labor issues
back in the spring and smaller kills than today, yet 50s traded in
the 70-90 cent range.

Sometimes escalating 50s prices precede a jump in cash cattle
prices, so that is important to be aware of. I am projecting this
week’s fed kill at 522k, which is a little smaller than what I gauge
as necessary to keep the cattle supply current. Steer carcass
weights were reported one pound higher today, so perhaps
weights have now bottomed. Next week, I expect carcass
weights to post a big gain because the data will reflect slaughter
during the week that contained the 4th of July. We continue to
see domestic beef demand erode and that is illustrated by the
combined margin chart below. It still has a way to go before it
gets back to “normal” levels, however.

Retail beef prices for June were reported this week and they were
up 7.2% from May. At $7.46/lb, they are only slightly below the
levels posted last spring when COVID shut packing plants and
wholesale prices soared. Now that consumers are beginning to
see the true cost of beef in the grocery store, it will cause them to
purchase less and that is showing up as weaker domestic
demand. Retailers will need to lower retail prices in the coming
months in order to “buy back” some of the demand that is
currently being lost. Retailers are notoriously slow to lower retail
prices, so that important adjustment might take several months.
Export demand looked strong in the official May data that was
reported earlier this month, but the more timely weekly data has
shown some softening in exports. China is still taking a large
amount of US beef and that is probably the difference maker as
far as exports go.

Without this newfound business out of China, beef exports would
be looking rather dismal right now. The futures market seems to
be just marking time and waiting for something significant to
change in the cash markets. All of the remaining 2021 contracts
appear to be locked in a sideways trading pattern. Next week,
expect more of the same—declining beef prices and near steady
cattle prices. Also, watch the 50s for signs that the current strong
rally is nearing an end..

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