Beef Wraps

This week was full of bad news for packers. First, the cutouts
continued on a downward trajectory at a time of year when they
should be rallying. Then, cash cattle prices exploded higher. On
Wednesday, cattle feeders dug in their heels and forced packers to
pay a little more than $3 up for the cattle they will kill next week. It
looks like the average this week will be a little over $156/cwt.
Meanwhile, the Choice cutout lost $2.93/cwt. on a weekly average
basis and the Select was up $1.60/cwt. Unless there is a substantial
rally in beef prices next week, packer margins could be negative by
close to $40/head when those more expensive cattle show up for
slaughter. We have to go all the way back to Jan, 2020 to find the
last time that beef packer margins were negative and even that was a
very brief incident. Yet, there are still no signs that packers are willing
to scale back the kill. This week’s holiday-reduced steer and heifer
slaughter registered 456k, down 65k from the week before. However,
packers are expected to be right back to normal next week with a fed
kill near 525k. That is too much beef for the market to comfortably
handle and thus lower prices are required to clear it. The end meats
in particular are not holding up very well. This week chuck meat was
discounted heavily and that was more than enough to outweigh the
modest gains in Choice rib prices. Right now the ribs are the only
item providing support for the cutout and they are living on borrowed Sometime in the next couple of weeks all of the Christmas rib
business will be done and it is common to see rib prices drop like a
rock during the second half of December. It is hard to see what will
keep the cutout from moving substantially lower once the ribs give up
the ghost. My current forecast has the Choice cutout back down to
$240 by the end of December and I’m concerned that might be too
high. If cash cattle prices don’t decline and hold in the mid $150s, the
losses for packers could approach $100/head. Will that actually
happen? It could, but I suspect that packers will start to talk louder
about kill cuts and they will have the benefit of back-to-back short kill
weeks at the end of December to help that along. Further, the signs
are growing that feedyard currentness is slipping. The percentage of
cattle grading Choice or better shot higher in this week’s data and
carcass weights did too. The DTDS weights are now almost back to
the zero line and that suggests that it might not take much of a kill
slowdown to change cattle feeder’s attitudes. Packers may opt to
continue the big kills until Christmas and the hope that the short kills
alone will be enough to break the cattle market. That would be a
pretty big gamble that might not pay off. A better bet would be to
seriously curtail kills for the next couple of weeks to send a message
to both beef buyers and cattle feeders. So far, packers haven’t
shown a willingness to do that.I thought that the top in carcass weights had already been made, but steer carcasses surprised everyone and jumped six pounds this week. It looks like they could move higher again next week too.
There was some snow in the Texas panhandle region this week, but
it probably wasn’t enough to put a serious dent in cattle performance.
Some modest snow is in the forecast next week for the Northern
Plains, but it doesn’t look particularly onerous at this point If you think
cattle feeders are bulled up now, just let 2 or 3 big snowstorms roll
across the Plains. It is very important to watch the weather at this
time of year.
The demand side of the market feels really weak right now. The
combined margin is hovering near zero, but should be due to start a
fresh upcycle soon. Exports seem ok, but not great, based on the
weekly data out of FAS. I think some of the imbalance is the fault of
retailers, who have kept retail beef prices elevated even though
wholesale prices are sagging. That has the effect of slowing
movement through the retail channel and that isn’t a good thing when
packers are determined to keep kill levels high. Of course, retailers
keep hearing stories about how the cattle herd is rapidly shrinking
and that probably makes them more reluctant than normal to
consider lowering prices. Besides, none of the other prices on items
they sell are going down, so why should they lower beef prices?
Beef demand normally gets a bit of a lift during December anyway,
when consumers are in a festive mood and tend to splurge. That is
particularly true in the foodservice channel. The macroeconomic
picture hasn’t really improved much lately, outside of some gains in
the equity markets. It still looks like rising interest rates may tip the
economy into a recession next year. So, while we might indeed see
demand cycle higher in December, I’m not very confident that it will
be a strong push higher, nor that it will last very long. The holiday
hangover in Jan/Feb has a way of resetting consumer enthusiasm.
Next week, watch the daily kills for any signs that packers are ready
to slow down. Also keep an eye on those end meat prices because
they may be the ones that end up determining the direction of the cutout next week.