Beef Wrap July 9
Cash cattle continued to trade in a two-tiered market this week,
with cattle in the North bringing $124-126 and cattle in the South
bringing $120-122. It looks like the weighted average will be close
to $121, so that is down almost $3 from last week’s average near
$124. There are two things going on here. First cattle on feed
numbers are tighter in the north than in the south. Second,
northern cattle typically grade better than southern cattle which is
important in the current environment where the spread between
the Choice cutout and the Select is over $20.
I’m expecting packers to put together a large Saturday kill this
weekend in order to help offset the lost production from Monday’s
holiday. If they do that, the fed kill may come close to 450k. Next
week, it is back to a full kill schedule and a fed kill closer to 525k.
This week’s light production hasn’t done much to slow the decline
in beef prices, with the Choice cutout dropping over $6 so far this
week and the Select down about $7. The short kill does seem to
have influenced the 50s market however, with prices there
reaching $118 this week. The fact that carcass weights are at or
near their annual low is probably also providing support to the fat
trim market. This week both the end cuts and the middle meats
contributed to the weakness in the cutouts, while briskets and 50s
were mildly supportive.
I think there are enough cattle available for packers to kill about
525-530k per week through the balance of July, but there is some
risk that they will be reluctant to press it that hard because they
might fear what it would do to the cutouts. However, if they can
just get through July, then cattle availability should drop (assuming
that we don’t back any cattle up during July) and weekly fed kills
could be scaled back to 510-515k without creating a backlog.
Packer margins continue to slowly work lower and I have this
week’s margin at $655/head, still incredibly large, but it is down
about $400 from its peak just five weeks ago. I think the margin
continues to erode through summer and early fall. Cattle feeders,
on the other hand, continue to suffer losses. I have cattle feeding
margins around $140/head in the red this week. The last time
cattle feeders had a reasonable positive margin was in January
2020. Imagine a running a business where you go a year and a
half without any profit.
Eventually, things will turn in favor of cattle feeders once the herd
shrinks to a level that is more consistent with the available packing
capacity. There is some new capacity in the works also, but that
might take 2 years or more to begin operating. While they are
waiting for industry conditions to get to the point where they will
make money again, cattle feeders should keep their fingers
crossed that another disaster (ie, plant fire, pandemic,
cyberattack) doesn’t happen. They have had a terrible string of
luck in the last few years.
It is pretty obvious that the air is starting to come out of the
demand side of the market. The combined margin chart below
illustrates this well. It is not hard to predict that this will continue,
but it is difficult to know when the leakage will stop. Right now
there appears to be no end in sight. My forecast has the Choice
cutout now moving down close to $250 by the time Labor Day
arrives. I’d see the bottom somewhere in the high $220s coming
near the end of the year or in January. As packing margins retreat
to more traditional levels this fall, packers are likely to get more
serious about managing the margin and that should lead to some
pressure on cash cattle prices.
For the balance of summer though, I think packer margins will
remain wide enough that they don’t need to pressure the cash
cattle market much below $120 and better currentness in
feedyards may allow cattle feeders to actually advance cash
prices a small amount before August expiration. Next week marks
the beginning of the “dog days of summer” when meat demand
typically fades. Watch the cutouts for an indication of whether or
not that will be the case again this year.
