Beef Wraps

It was more of the same in the cattle and beef complex this week—
cash cattle steady in the $123-124 range and beef cutouts falling
like a rock. The Choice was down $11.47 on a weekly average
basis and the Select was off $8.58. Some packers did plant
maintenance this week and that limited the fed kill to 496k—
woefully short of what is needed to keep feedyards current.
Numbers should be tighter in Oct and Nov, so perhaps some
catch-up can occur then. It is neither here nor there for cash
cattle prices since packers will continue to support them in the
mid-$120s as long as their margins are super-strong.

I calculate this week’s margin at $894/head, so margins are slowly
declining from the $1000+ level that we saw just a few weeks ago.
It will be interesting to see of the shrinkage in market-ready cattle
during Q4 causes packers to compete more aggressively and
thus bid up cattle prices. Economic theory says that should be
the case, but my gut tells me that packers will find a way to keep
from increasing cash cattle prices much if any. They have
become experts at that. Carcass weights are still below last year,
but not by much, and I’m forecasting them to reach year-ago
levels later this year (chart below). That won’t do cattle feeders
any favors. It will help improve beef availability however, and
beef buyers should be glad to hear that. This week the rib primal
finally broke lower and the question now is how long that will last.
Soon buyer’s attention will turn toward securing middle meat
needs for the holidays and that could cause an abrupt turn around
in the ribs.

However, I’ve heard chatter that many big buyers have already
secured holiday ribs and put them in a suspended fresh program.
If that is the case, then perhaps the ribs can continue to work
lower right into the holiday season. That would violate one of the
most predictable seasonal patterns in all of agriculture—ribeye
prices rising from Q3 into Q4. It has been a strange year indeed.
The chart below shows that all primals were lower this week, so
even end meats are helping to push the cutout lower at this point.
My fundamental forecast has the cutout continuing lower right into
December, mostly on demand pulling back from the super-strong
levels that we saw this summer. However, I’m pretty nervous
about that forecast.

The combined margin chart continued lower this week and that is a
sign of softening demand. The slope of this decline seems to be a
bit flatter than the previous cycle, so it seems reasonable to expect
the drop in the cutout not to be as aggressive as it was back in
June/July when it was in a downcycle. Live cattle futures were a
little higher this week, but traders may come to regret that since
this afternoon’s Cattle on Feed report showed August placements
up 2.3%, which was considerably larger than the average trade
guess.

That could trigger some selling in the deferred futures on Monday.
At this rate, it won’t be long before traders start to give up on the
idea that cash cattle prices will ever be anything except $124
again. If cattle feeders want to move cattle prices higher, then they
need to sharply reduce placements so that available cattle
supplies line up better with the reduced throughput in plants that is
being caused by tight availability of labor. So far, cattle feeders
have not done enough to constrain placements and so will need to
depend on packer generosity to hold cattle prices in the mid
$120s. That holding of cash cattle prices in the mid $120s might
actually be a great long-run strategy for packers since it is close
enough to cattle feeding breakevens that they are not feeling
serious margin pressure and it normally takes deep red margins to
convince cattle feeders that they need to do something differently.
By paying $124 and thus holding margins only modestly in the red,
packers will encourage cattle feeders to keep placing more cattle
than they should and thus the leverage meter could stay in the
packer’s favor for a long time to come.

Those sneaky packers. I guess we need to get the government
involved. Next week, expect more of the same—steady cattle
market and lower beef prices. Watch the ribs for signs that holiday
buying is beginning to have an effect