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 October 1

Cash cattle averaged a dollar lower this week at $122.65, but other
than that, it was more of the same in the cattle and beef complex
this week. The cutouts continued lower, with the Choice down
almost $11 on a weekly average basis and the select down a little
less than $6. That compressed the Choice-Select spread down to
$27 from $32 the week before. The rapid decline in rib prices is
primarily driving the spread lower. I don’t expect it to get a whole
lot narrower from here and am forecasting it to expand back out to
over $40/cwt near the end of October. The chart below indicates
that all of the primals except the round were contributors to this
week’s drop in the cutout.

While it felt like the ribs were the major contributor, they actually
had a similar impact on the cutout as lower chuck prices did. It has
been clear from the daily demand scatters that beef demand is
softening and the combined margin chart points in that direction
also. We know that almost all of the price softness must be
attributable to weaker demand because beef production hasn’t
changed all that much, now estimated at around 537 million
pounds per week. The fed kill was disappointing this week,
registering only 492k as some cooler cleanings were going on and
the Saturday kill wasn’t boosted to make up for that. The flow
model tells me that in October the fed kill needs to run about 505k
per week in order to not backup any additional cattle. We have
probably already backed up about 20-30k from September. All that
means is the cattle supply will remain ample this fall, while the beef
supply will be constrained by packer’s ability to get them all dead in
this tight labor environment.

So far, carcass weights seem to be behaving normally as they rise
toward a peak in early November. This market isn’t very
complicated at the moment. It is clear that the cattle supply
modestly exceeds the packers ability to kill them and that has kept
cattle prices in check. The beef market is resetting after moving to
super-strong levels late in the summer. And everyone is just
watching the beef come down and waiting for it to find a bottom.
Once beef prices catch however, things could get interesting.
Buyers may rush in at that point and thus create a V-shaped
correction because they remember how fast prices rose this
summer. I’ve revised my thinking a bit on the ribs going into the
holidays. Now I look for them to decline for 2-3 more weeks and
then see a modest increase into late November, but I’m not
expecting the top this fall to exceed what we saw in late August.

That change in the forecast pattern for ribs has also altered the
pattern for the cutout, so that it doesn’t decline quite as rapidly as
I had forecast before. I’ve got the end meats posting some
modest gains over the next couple of weeks, but then trending
lower right into December. Beef 50s fell hard this week, losing
$25 Friday-to-Friday and finishing up today at $103. 90s are also
slowly working lower as seasonally larger cow kills are providing
some supply side pressure. That will eventually make the grinds
look more attractive to retailers, but I’m not sure the consumer is
all that fired up about grinds at this time of year.

Futures traders showed they are running out of patience this
week, pushing the cattle curve down by $2-3. It is becoming
painfully clear that as long as the labor bottleneck is affecting
plants, the price of cash cattle isn’t going up. So with each
passing week, the premiums on deferred futures look less and
less attainable. The October contract will enter its delivery period
on Monday, but is trading over $3 under the spot market so there
isn’t much risk of deliveries occurring. It looks to me like the Oct
contract is demonstrating more pessimism than is warranted and
it will likely put some money back on as it moves through October.
A rising October however, does not guarantee that the rest of the
curve will move higher with it. Export demand for beef continues
to look very good in the weekly numbers that we watch.

The official monthly export data from ERS for the month of August
will be released Wednesday. I’m expecting it to show about a 9%
YOY increase. China continues to be a big customer for US beef
and I don’t look for that to change anytime soon. Next week it will
be more of the same, with everyone sitting on the edge of their
chair waiting for the cutouts to find a bottom. I don’t expect that
will happen next week, but it could materialize by mid-month if the
ribs get low enough to attract those that still have unmet needs for
the holidays.

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