Beef Wrap October 8
I thought about just saying “see last week’s wrap” and call it a
day. Once again, it was more of the same in the cattle and beef
complex. The only thing that really changed this week was that
futures traders realized how oversold the futures had gotten and
they corrected that with five green bars in a row on the nearby Oct
contract. The fact that the nearby could gain $5 in a week where
pretty much nothing changed fundamentally is a testament to how
oversold they had gotten. Let’s review what has become a familiar
story: the beef cutouts moved considerably lower and the cash
cattle market was essentially unchanged. The Choice cutout lost
$11.37 this week and the Select was down $6.33.
The Choice ribs continue to correct lower at a rapid clip and that
was the primary driver of this week’s losses, although the chucks
and loins helped out to some degree. Everything except the ribs
has, at times, looked like it was ready to make a bottom. I think
the rib has maybe one or two weeks of downward momentum left
and then it will work modestly higher into Thanksgiving on holiday
buying. If the ribs keep moving lower, then it will be hard for the
cutout to gain much, if anything, in the next couple of weeks. The
average price of cash cattle this week was reported at $122.96,
which was $0.40 higher than last week. With beef prices down
and cattle prices essentially steady, packer margins compressed
to $789/head. I have those margins working slowly lower over the
next few weeks, but remaining above $600/head into
Thanksgiving. I do have some small gains in cattle prices dialed
in near the end of October and early November, since that is
when cattle supplies should be near their tightest based on past
placement patterns.
However, from Thanksgiving onward, I’m looking for the cattle
market to give back some ground and currently see a $124 cash
cattle at the end of the year. Yeah, I know, not too much different
from today. In the interim, we might be able to take the cash to
$127-128. There is something different for you. The cash cattle
market has traded between $120 and $125 for 21 straight weeks
now. That is close to half a year! That is why I think the futures
will remain rangebound. Traders should be able to see that cash
isn’t going to move substantially in the near-term.
Ditto for feeder cattle, which gained on fats this week. This
week’s fed kill came in at 512k, which is a little above the
required kill based on past placements, so maybe a few
backlogged cattle got cleaned up. However, the daily kills are
still pretty erratic and packers are doing maintenance and cooler
cleanings, so in any given week the fed kill can fluctuate 10-15k.
Steer carcass weights were up two pounds this week and my
forecast has them gaining 15 more pounds before they make a
seasonal top in early November. There is a significant snow
event forecast for the Northern Plains states in the middle of next
week and that could set the cattle in that area back some.
Cattle are like people—the first cold blast of the season makes
them miserable and that isn’t conducive to weight gains. This
week we got official export volumes for August and the data
showed a 21.2% YOY increase. Keep in mind that US beef
prices were sky high in August, with the blended cutout up 44%
from August 2020. When you see bigger volumes moving at
higher prices, that is a classic sign of much stronger demand. In
this case it is international demand. China and Mexico are
leading the charge on that. Given that price levels in September
and October were much lower than August, I’d expect to see
USDA report strong export numbers for those months as well. It
is just unfortunate for cattle feeders that they can’t participate
financially in the windfall that strong domestic and international
demand is creating for packers due to the labor bottleneck that
exists. Next week, expect more of the same—weaker beef prices
and stagnant cash cattle prices. Futures may correct lower, but
otherwise it will likely be more of the same.
