Beef Wrap September 2
The cash cattle market slipped lower again this week, averaging
$142.82, down almost $2 from the week before. That decline was
accompanied by further softness in the cutouts, with the Choice
dropping $3.56 to average $259.73 for the week, while the Select
was up $0.85 to average $239.07. However, the cutouts were
strengthening late in the week and stand a good chance of gaining
more early next week as packers will have less product to offer due
to the long holiday weekend. Packer margins posted a small gain
this week, up $10 to $175/head, but cattle feeding margins
declined more than packer margins gained, thus the combined
margin continued lower this week. It doesn’t look to me like the
combined margin is near a bottom yet and September can
sometimes be a weak month for beef demand, so it seems likely
that the current downcycle in the combined margin will continue for
a few more weeks.
It was a quiet week as far as beef market news goes and most
everything seemed to play out as anticipated. The futures lost
ground early in the week but made that back plus some with a lateweek rally. Now that the Aug futures have expired, Oct will take
over as lead month and traders will not be constrained by the threat
of delivery in the near-term, so they can express their view on price
without worry. We have seen cash cattle prices oscillate in a
narrow band between the high $130s and the mid $140s for most
of the year. The attached chart shows this pattern clearly and if it
is to continue, then there is likely more downside risk in cash cattle
prices in the near term. At today’s close of $144.50, the Oct
futures are only about $1.50/cwt over the current cash market, so
producers won’t have much incentive to delay marketings and that
could be what keeps cash cattle prices on their downward
trajectory.
In addition, the short kills around Labor Day should reduce some of
the leverage that cattle feeders have had over packers in recent
weeks. This week’s fed slaughter registered 499k, and I’m dialing
in a 465k total for next week. After that, kills could easily bounce
back up to 530k per week, but I think that packers will want to be a
little more cautious and perhaps not press that hard immediately
following the holiday. Steer weights were reported three pounds
higher at 904 this week, so the seasonal pattern remains in place.
This week’s weight data didn’t do much to move the DTDS weights
and that is still a concern. Right now, the DTDS weights are the
single most bullish factor in the cattle fundamental picture.
Those weights suggest that feedyards remain very current at
present, but if that were the case, why were packers able to take
$4 off of cash cattle prices in the last two weeks? I suspect that
the low level of the DTDS probably reflects some ration changes
that cattle feeders have made in response to high corn prices and
thus cattle aren’t gaining as fast as they might would otherwise.
Of course, that also affects grading, and it is pretty clear that the
grade is pretty depressed right now. The Choice-Select spread
averaged $20.66/cwt this week, down a little over $4 from the
week before, but that was likely because middle meat demand
was a bit lower. That trend toward a narrower spread could
continue through the first half of September, but once the middle
meat buying for the end-of-year holidays starts to ramp up, I
would look for the spread to widen back out considerably.
In fact, buyers that need Choice or Prime product in Q4 would be
wise to use any price weakness that might arise in September to
cover needs for the end of the year. I wouldn’t be surprised to
see the spread between Choice and Select to exceed $35/cwt at
times this fall. There wasn’t much improvement in the macro
picture this week and the equity markets posted further losses. If
that continues, consumer spending is likely to slow and that
would be a negative for Q4 beef demand. Oil and gasoline prices
are the one bright spot, and consumers in some parts of the US
might soon see gas prices below $3/gallon. However, one of the
things pressuring oil prices right now is an expansion of COVID-related lockdowns in China and that has the potential to temper China’s demand for US been in the near term.
If it does, we probably won’t know about it right away because
USDA’s weekly export reporting system is offline for at least a
couple more weeks. Our next read on beef exports will come on
Thursday, when ERS releases the official trade data for July. I’m
looking for another strong showing in that data, perhaps up
5-10% from last year. Next week, we could see an early bounce
in wholesale prices as retailers fill-in after the long weekend, but
that might only last a couple of days. Look for cattle prices to
continue lower and the futures to take back some of the optimism
it displayed on Friday.
