Beef Wrap October 7
It was a pretty quiet week in the beef market with the Choice
cutout only gaining $0.16/cwt. on a weekly average basis and the
Select cutout losing $1.62/cwt. As a result, the blended cutout
was just a few cents lower on the week. The cash cattle market
was stronger, averaging close to $146, which was about $1.20/
cwt over last week. Packer margins came in at about $78/head—
not much change from last week. So far we haven’t seen the
surging middle meat demand that normally starts early in Q4.
The rib primal posted a small week-on-week gain, but the loin
primal posted a small loss for the week. Perhaps the most
notable change in the beef complex this week was the 50s
moving below $80/cwt, down about $8 from the week before.
Given that fed kills are now smaller than they were back around
early September when the 50s were averaging in the low $100s,
I’d say that this drop in the 50s is more related to demand than
supply.
I take it as an ominous sign when one of the cheapest items in
the beef complex is having demand problems. Chicken prices
have been coming down rapidly as production is increasing and
that is likely steal some demand from the grinding complex in the
weeks and months ahead. The macro environment didn’t get any
better this week as equity markets posted strong gains early and
then gave all of it back at the end of the week. That is the type of
price action that makes people feel crummy about the prospects
for the future and is likely to dim their confidence in the economy.
LC futures managed to rebound some this week, but that was just
a bounce up from seriously over-sold conditions in the prior
week. Futures traders must be encouraged that cash was able
to advance a little further this week, but packers really haven’t put
up much of a fight yet.
At some point in the next few weeks, I’d expect packers to dig in
and refuse to pay up for cattle and that will probably be met by
producers refusing to sell any cattle. We haven’t had a week of
no cattle trade for quite some time. Right now, I’d say that
producers have the upper hand because the front-end supply of
cattle still seems very current. The ultimate solution is for
packers to pull back on the kill, which is something they haven’t
shown much interest in. The other out would be for boxed beef
prices to rally sharply and restore packer margins without the
need to pressure the cash cattle market. The market is due for a
rally, so maybe that is how it will play out. The combined margin
ticked a little higher after nearly touching the zero line last week.
It could be that demand is just about to enter another upcycle. If
we do get some seasonal improvement in demand, I expect that
it will be much more muted than what we’ve seen in previous
years due to the challenging macro environment. On the supply
side, the fed kill came in at 516k, down just 3k from the week
before. The flow model has been pointing to tighter fed cattle
availability during October, but it seems that packers want to
continue killing as though it were August. Packer margins have
been so large for so long, that it is difficult to gauge at what
margin level they will start cutting the kill. Will they wait until
margins are negative or will a $20/head margin do the trick?
They may be able to avoid that tough decision altogether if they
can get a decent rally in the boxes, but with each passing week
the prospect of a sharp Q4 price rally seems less likely.
Steer carcass weights dropped three pounds this week, taking
back some of the stunning 14-pound gain that happened in the
previous two weeks. The DTDS weights remain rather low, so it
seems as if feedyards are still pretty current. Packers will not get
cattle prices down unless they reduce currentness of the cattle
supply. My forecast has steer weights gaining another 18
pounds over the next 5-6 weeks towards a top in mid-November.
USDA provided the trade data for August this week and it
showed beef exports only 0.3% below last year, but that was the
first monthly decline in exports so far in 2022. To be fair though,
August was the top month for exports last year. Through August,
beef exports are up 5.5% YOY and the forecast has them
finishing the year up 6.1%.
So, I’m not projecting any serious softness in the export market
for Q4, but I do think that we will see some YOY declines when
Q1 rolls around. August beef imports were down 18% YOY, but
again, August was the top in beef imports last year. It looks like
the US will remain a small next exporter of beef in 2022, so I
don’t really think that a darkening trade picture will be what
hampers pricing in the next few months. It is more likely to be
problems with domestic demand, but those might not manifest
until after the fall middle meat rally has run its course. Next
week, watch the middles, particularly ribs, for signs pre-holiday
demand is beginning to creep in. Also, watch the daily kills for
signs that the packers are starting to see the need to dial down
slaughter rates.
