Beef Wrap July 23
Cash cattle markets were mostly lower, with the average so far
this week at $120.21, down over $2.50 from last week’s
average. The cutouts also continued lower, with both down
about $6 on a weekly average basis. However, the cutouts did
manage to eek out small gains on Wednesday and Thursday,
which has some wondering whether or not the market is
carving out a bottom and preparing to head higher. Ribs have
added value this week, along with the 50s, but the end meats
continued to be a drag on the cutouts. Retailers are likely in
the process of planning Labor Day features and beef middles
have to look pretty attractive after the prices they faced
heading into Memorial Day.
I see the ribs as having bottomed now and they should work
higher from now until November. Loins typically don’t follow
the same seasonal pattern—then trend lower right into the
holidays and those cuts remain on the defensive. End meats,
on the other hand, probably have further downside risk and that
will likely keep the cutout working lower, although at a much
slower pace than what we have seen in the past few weeks.
The 50s market added another $10 this week. It does seem
that all sources of fat are seeing elevated pricing right now, so
there could be a demand side component to the strength in the
50s, but I also believe that the supply of 50s is being limited by
below-average kills and lighter carcass weights. Steer weights
were reported one pound higher this week, but should have
added more than that if they were on a normal seasonal track.
The DTDS plunged lower and is a reminder that carcass
weights are actually in pretty good shape this summer. So far,
that hasn’t translated into additional leverage for cattle feeders,
but it might help cash cattle prices before long.
The key will be keeping packers interested in putting together a
long string of decent-sized kills. Unfortunately, it is beginning
to look like this week’s fed kill may underperform expectations.
The current forecast is for 511k of fed cattle to be slaughtered
this week. That is well below the 525-530k that I think need to
be slaughtered in order to keep cattle from backlogging.
Packers may surprise me with a big Saturday kill, but at this
point I’m betting on something relatively close to last
Saturday’s level around 45k. Packer margins moved lower
again this week, now at $535/head. They still have a long
way to go before they get back to normal and I’d expect the
rate of decline in margins to slow during August. One bright
spot in the beef complex this week was the weekly export
data, which showed nearly 40% improvement over last year at
this time. China continues to be a big buyer of US beef and we are also
seeing strong interest from Japan and Mexico. If exports
continue on this path, it will be worth several additional dollars
on the cutout this fall and winter and may help lift the cash
cattle market. Today’s cold storage report showed a 4.3%
drawdown in beef stocks during June and the inventory now
sits 7.4% below the five-year average. That is not nearly as
bad as the tight cold storage situation in pork, but it likely
means that the buyers will have to rely a little more on the
spot market this fall to meet their needs.
Next week, expect the cutouts to be lower again, but to a
lesser degree than in recent weeks as strength in the middles
helps to offset some of the weakness in end meats. Also
keep and eye on those 50s, because I can’t shake the feeling
that they are trying to tell us something.
