Beef Wrap October 14
The beef market just seems to be going nowhere. This week, the
Choice cutout averaged 246.31/cwt, down $0.58 from last week.
This is the third week in a row that the Choice cutout has been
stuck at $246+change. The Select cutout was a lot weaker
however, down $4.37 on the week. Apparently no one wants
Select grade beef. They all want Choice. This caused the
Choice-Select spread to move out to $31.56/cwt. Further, the trim
markets have been on the defensive. 90s lost $4 this week and
the 50s have dropped about $30 over the past four weeks. Select
grade beef and trims (i.e., ground beef) have something in
common. They are both lower-priced alternatives that normally
see strong demand from lower income consumers. Is the market
signaling that the lower income consumers are struggling?
It has occurred to me that perhaps the beef market is becoming
more bifurcated in recent months, with the upper income
consumers still doing well and still demanding the high quality
Choice+ beef while the lower income brackets are struggling and
possibly starting to trade out of beef to other proteins. That could
be a problem because close to 40% of all beef consumed in the
US is in a ground form. That is something to keep an eye on. It
is also a little concerning that we have made it to the middle of
October with the rib primal showing very little price gain. Maybe
the holiday buying is slow to get started this year, but the rib
primal only added $4.20/cwt. this week and is only $5 higher than
it was a month ago. The Choice loin primal is dripping lower
week after week, so its not like rib demand is shifting into loins. In
fact, this week the loins and 50s were the biggest drag on the
cutout.
I am definitely concerned about beef demand. The combined
margin pushed into negative territory this week and isn’t yet
showing signs of turning higher. Meanwhile, cattle feeders are
acting like beef demand is strong and demanding more money for
cattle week after week. Cash cattle averaged $146.77 this week,
up about $0.50 from the week before. That pushed packer
margins down to about $25/head. Oh, how the mighty have
fallen. Gone are the days of $500+ packer margins that were
common during the pandemic. The interesting thing about that is
that packers don’t really seem to care that their margin has nearly
vanished. They aren’t making any significant attempt to restore
margins by cutting the kill. This week’s steer and heifer slaughter
totaled 513k, down only 3k from the week before. The base
numbers out of the flow model suggested that the available fed
cattle supply in October would only be about 490k per week, but
packers are definitely over-killing that target and that is helping to keep feedyards very current and give cattle feeders
the leverage they need to keep cattle prices moving upward.
Available supplies during November and December shouldn’t be
much larger than in October and we may actually be “borrowing”
some Nov/Dec cattle right now to fuel big kills. That sets up a
situation where, between now and the end of the year, packer
margin improvement is going to have to come from raising beef
prices more than pushing down on cattle prices. That probably
means that margins will stay relatively tight for at least a couple
more months. Carcass weights were reported a little higher this
week, but they went up a little less than the normal seasonal
would imply, so weights continue to suggest feedyards are
staying current.
Quality grading on carcasses also improved a little bit this week,
but remains well below the historical average. USDA released its
retail beef price data for September this week and it showed a
small decline from August, but still very close to last year’s level.
If retail beef prices aren’t moving much, then perhaps that is why
wholesale beef prices have been so stable recently. Regardless,
it is clear that the consumer isn’t seeing much relief from high
beef prices at the meat counter. The weekly export data for beef
continues to look relatively good and the forecast has exports
remaining strong through the balance of the year. Domestic
consumers are a bigger threat to demand than international
consumers at this point. The Consumer Price Index for
September was released this week and it was up 0.22% from
August and 8.2% higher than last year.
So price levels in the macroeconomy are still rising, but at a
much slower rate than earlier this year. That has led some to say
that inflation is receding, but I don’t think a rapid reduction in
price levels will happen anytime soon. Given that our beef
demand indexes now incorporate the CPI, this means that it is
necessary to forecast inflation levels well into the future in order
to arrive at the fundamental beef price forecast. That adds to the
complexity and definitely increases the potential error. The Fed
appears to be dead set on continuing to raise interest rates until
the labor market cools down in a meaningful way. That could
take a while and require forcing the economy into a recession in
order to achieve that goal. Recessions are never good for beef
demand. Next week, fingers crossed for a bigger gain in some of
the middle meat items, because without that packer margins
could easily move into the red. Also watch trim prices because
they seem to be indicating that the value-conscious consumer is
becoming less interested in beef.
