Beef Wrap November 26
The cash cattle market continues to march higher while the beef
market slips lower. Last week’s average price for cash cattle was a
little over $133, up $2 from the week before and so far this week,
packers have come out bidding $135 to $137. Cattle feeders have
packers over a barrel and they know it. Over the past seven trading
days, the Choice cutout has slipped $4.51 and the Select is down
$4.61. As beef pricing falls and cash cattle rockets higher, packer
margins are compressing rapidly. Last week’s margin averaged just
under $600 per head and it looks like margins this week will be down
another $70 to $530/head. I fully expect packer margins to be below
$500/head next week when those $137 cattle start to show up for
slaughter. At the moment, packers are not really fighting back and
have just accepted that they need to pay up.
That is likely in their best interest because they have some highpriced orders that were booked back in Aug/Sep and it makes sense
that they not short those buyers. Soon however, those orders will be
in the rear view mirror and packers are more likely to resist higher
cattle pricing. Part of the problem in forecasting this market is no one
really knows what a “normal” packer margin is anymore. Prior to
2018, a normal November margin would have been in the $40-100/
head range, but in the last couple of years margins have averaged
around $335/head in November. If we were to use that as a guide,
then cash cattle could move into the mid $140s before margins fell to
$335/head. Is that where we are going? Cattle feeders seem to
think so, but futures traders are not yet ready to sign up for that. For
one thing, it is likely that future margin compression will come from
lower cutouts not just higher cattle prices. I’ve got the Choice cutout
working back toward $250 by the end of the year. If that comes true,
then cash cattle at $130 will generate a margin of only $275/head.
Further, once the holiday orders are filled, packers can scale back the
fed kill in order to cool off the cash cattle market.
The holidays will give them some cover to reduce the kill and I’m sure
that their workforce will greatly appreciate a less demanding schedule
in December. Kills have been large recently, with last week’s fed kill
registering 530k, which is well above what the flow model projects to
be available at this time of year. When packers want to over-kill the
cattle supply, they create a situation where cash cattle prices can rise
and feedyards get more current. With the Thanksgiving holiday right
upon us, this week’s fed kill may only be about 450k, so that will
provide some relief. After Thanksgiving, I expect packers to be less
aggressive and thus the fed kill could move back down into the
510-520k range. Carcass weights are near a seasonal top and will
soon start trending lower.
That will help tighten up the beef supply and thus provide some
support for the cutouts in January. The DTDS weights aren’t
signaling that feedyards are super-current, but they are well above
the lows that were made in late summer. Since feedyards aren’t
super-current and beef demand is easing, I believe that this rally in
the cattle will be short-lived and cash prices will be lower at the end of
the year than they are today. Time will tell. The chart below indicates
that the weakness in beef prices has been concentrated in the end
meats and the ribs to some degree. The ribs have failed to rally
ahead of the holidays and are now living on borrowed time.
By the second week of December, ribs are likely to be moving lower
in big chunks. It could happen sooner than that. End meats might
garner a bit of support between Thanksgiving and Christmas as
retailers look to offer consumers something different from the usual
holiday fare. Still, I don’t think that the ends will provide enough
support to keep the cutouts from moving lower once the ribs start to
break in earnest. The scatter diagram below gives the November
demand curve, with the cutout deflated using the CPI. As you can
see, the Nov21 data point is still exceptionally high, indicating very
strong domestic beef demand persists. The combined margin chart
also suggests strong, but declining, demand. In the old days, it used
to be common for the combined margin to reach the zero line, but it
hasn’t been anywhere near zero since the arrival of the pandemic.
My guess is that it will continue to move lower, but won’t be near zero
any time soon. COVID infections in the US are starting to rise again
and with holiday gatherings just ahead, that trend is likely to continue.
We know from past experience that rising infections have been good
for beef demand, but with almost 2/3rds of the population fully
vaccinated and boosters widely available, rising infections won’t
generate the same stay-at-home mentality that it has in the past and
thus probably won’t boost beef demand to the same degree that it
has in the past. Last week’s Cattle on Feed report showed October
placements up 2.4% YOY and total on-feed inventories nearly equal
to last year, so there isn’t a shortage of cattle. Soon, the industry will
transition out of the near-term cattle supply tightness that was created
by small placements back in May/Jun/July and that will also help
keep cash cattle prices contained.
