Beef Wrap October 28
The seasonal increase in beef prices got underway in earnest this
week, with the Choice cutout gaining $9.26/cwt. and the Select
cutout up $7.69/cwt. Of course, when cattle feeders saw that,
they wanted their piece of the pie, and they got it. Cash cattle
prices advanced almost $2/cwt. to finish the week very close to
$152/cwt. Since the beef moved up more than cattle, packer
margins expanded and are now back close to $95/head. It is
considerably easier to get packers to pay up for cattle when the
boxes are advancing rapidly as they did this week, but I suspect
that when the boxes turn lower a few weeks from now, that cattle
feeders will not want to give back any of the ground they have
gained in the cash market. At the moment, neither packers or
feeders are too concerned about it because both markets are
rising, but the cutout normally makes its seasonal top just before
Thanksgiving and the calendar will turn to November next week.
That means there might only be 2-3 more weeks of seasonal
increases in the beef before the cutouts falter force packers to
make some tough decisions about how they are going to reset
cattle feeders’ price expectations. I think that packers hands are
going to be tied over the next couple of weeks due to the fact that
they have forward sold a lot of beef that will beef that will need to
be delivered in the second half of November (see attached chart).
When packers have a big forward book to fulfill, slowing down the
kill is not a viable option so they normally end up paying what
cattle feeders want. That means we could be looking at another
couple of weeks where the cash cattle market advances $2 or $3
per week. However, once the orders have been delivered, the
cutouts are likely to be in the process of turning lower and that will
give packers a lot of financial incentive to reverse the gains in the
cattle market.
That is when the fight is likely break out. Normally, packers have
the upper hand in those types of price skirmishes because they
can always slash the kill, but for some reason packers have been
reluctant to bring out that powerful weapon in the last few months.
If they don’t get a better handle on the cattle market they are likely
to have some serious margin woes as we move into next year.
Beef demand in Jan/Feb is usually way softer than in Nov/Dec and
that means considerably lower cutouts early next year. However,
the futures market is now pricing cattle in February $3 higher than
in December. If packers allow that to come true, we could see
significant red ink on packer income statements in Q1. This
week’s gains in the cutout were more spread out across the
carcass than expected.
The middle meats were expected to contribute a nice chunk, and
they did, but the surprise was that the chucks and rounds also
showed strength. My feeling is that the ends won’t be able to
keep pace with the middles in the next few weeks and we will
likely see the ribs take a bigger leadership role. Beef demand is
in and upcycle now and the combined margin is confirming that,
but I’m a little concerned that this upcycle will be shorter than
most and fail to reach the tops that have been common in recent
cycles. Further, the next downcycle will likely coincide with the
completion of the holiday business and thus it might be deeper
than in recent lows. The macro picture still looks pretty dark and
the odds of a recession remain relatively high. The stock market
has recovered a bit lately, so that might help consumer
confidence heading into the holidays, but I’m more concerned
about what will happen once we are beyond the holidays.
The supply side of the market looks pretty good at present. This
week’s steer and heifer kill clocked in at 515k, still about 10-15k
more than what our model suggests should be available. Steer
carcass weights were up four pounds this week and that is
helping add to the beef supply. However, weights are only a few
weeks from topping and turning lower. The DTDS weights have
risen a bit in the past few weeks and that seems to support the
idea that feedyards are becoming less current, but that is at odds
with the fact that we are seeing larger-than-expected fed kills
week after week. Maybe packers have been borrowing some
cattle from November to fuel big kills in October.
The flow model suggests that November fed kills should be
around 510k in the non-holiday weeks, but with the big forward
book coming due, there is a decent chance that early November
kills will exceed that level. Beef exports seem to be holding up
well and we will find out more next Friday when USDA releases
the trade data for September. Overall, I’d say the market seems
to be in good balance right now and behaving more normal than
it has in the past three years. There are still a few quirks that
seem odd, like packers refusing to cut the kill in the face of tight
margins, but taken as a whole the market seems to be performing
smoothly. Next week, watch for the gains in the middle meats to
outpace the ends and lead the cutout higher. Cash cattle are
likely to advance again and the futures market will probably
applaud again.
