Beef Wrap October 15
The live market for cash cattle was up a little less than a dollar
this week to $123.85. That puts it about right in the middle of the
trading range it has been stuck in for the last several months.
The cutouts continued lower although the losses were very small
near the end of the week. The Choice lost $5.86 on a weekly
average basis while the Select was down $3.61. I’d say the
biggest news in the complex this week was that the losses in the
beef market really slowed down and that could be an indicator
that a bottom is near. The all-important rib primal was down
about $28 this week, but most of that came early in the week. By
the end of the week small price gains were noted.
It may be late getting started, but it looks like we are going to see
at least a modest price rally in the ribs heading into the holiday
buying season. That should be enough to turn the cutouts
modestly higher for a few weeks, but I’m not looking for the
Choice cutout to move back over $300 again in 2021. End meats
are projected lower between now and Christmas as retail feature
interest will shift toward hams and turkeys. Ribeyes and
tenderloins should help to lift their respective primals some over
the next few weeks. Briskets are also called higher into
November. The scatter diagram below confirms that beef
demand is still exceptionally strong relative to past Octobers. I
look for that to continue, but expect the current data point to
slowly move back down closer to the regression line. It may take
many months before it gets back down to what could be
considered a normal level. Unless we have another unforeseen
shock to the system, I’m expecting beef prices to work lower over
the next year or so as demand fades and packers find solutions to
the labor bottleneck that has kept beef production constrained.
This week’s fed kill registered only 501k, down 15k from the week
before. That was a disappointing development that was driven by
at least a couple of plants not operating on Friday and there was
no attempt to make up the volume on Saturday. A 501k fed kill
likely is close to sufficient to process all of the cattle that were
targeted for this period, but it doesn’t help to dissipate any of the
carryover cattle from August and September. As such, it makes
it likely that cash cattle prices won’t have a huge rally as we move
through the fourth quarter.
I do have cash cattle working up to $127-128 in November when
cattle supplies should be the tightest, but my expectation is that
won’t persist for long and by the end of December we can expect
cash cattle back down around $125. This week’s carcass weight
data indicated weights are still trending seasonally higher and
are narrowing the gap with last year. I’ve got weights peaking in
the last week of October, but they have been known to peak
later than that.
Packer margins fell $48 this week and now sit at “only” $760/
head. It took five weeks to reduce margins from $1000 to $800.
I expect margins to continue to compress, but at that rate it will
be sometime next year before they get back to more normal
levels. Cattle feeding margins appear to be about $90/head in
the red. That’s not enough of a loss to prompt feedyards to
slash placements and packers probably want it to stay that way.
In fact, the data lead me to believe that September placements
are going to be reported about 5% over last year when USDA
releases their Cattle on Feed report next Friday. October
placements could be up that much or more also. So it doesn’t
look like cattle feeders are undertaking any serious effort to
place their way out of negative margins. The only other way out
of negative cattle feeding margins is for packers to find and train
enough labor to remove the bottleneck in plants.
Perhaps that is what cattle feeders are hoping for, but it seems
kind of foolish to hand over one’s destiny to packers. It would be
much better for feedyards to take corrective action themselves.
Futures were modestly higher this week, building on last week’s
gains, but as the Oct contract started to approach $126 late in
the week it drew 25 deliveries on Thursday and another 31
deliveries on Friday. Next week, look for further improvement in
rib prices to turn the cutouts modestly higher. Because of the
bottleneck, that won’t matter much for cash cattle prices, but it
will raise costs for those beef buyers still short on holiday middle
meats.
