Beef Wrap September 3
Live cattle futures traders seem to have lost their optimism for the
future. The Dec LC contract, which traded over $138 at one point
last week, closed Friday just a little under $131. Why the sudden
shift in expectations? Well, at least part of it has to be due to the
fact that the futures got way overdone following last month’s Cattle
on Feed report. Traders saw the 8% YOY drop in placements and
couldn’t buy the Dec futures fast enough. It didn’t matter to them
that the beef market looked toppy and was about to turn lower.
Now it does seem to matter. They realize now that the cash cattle
market isn’t going much of anywhere as long as labor is limited in
packing plants, making it difficult for packers to kill all of the
market-ready cattle each week.
Packers would really love to kill a lot more cattle since their margin
this week came in at $1050/head. That margin should start to
shrink now that the cutouts have turned lower, but even if it were
reduced by 50% it would still be a huge margin in a historical
context. To their credit, packers aren’t expending any energy to
push down on the cattle price. This week’s cash cattle average is
$125.93, only a few cents higher than last week’s average. As far
as the cutouts go, the Choice has dropped about $7.50 this week
and the Select is down a little over $9. Beef buyers recognize the
turn lower and are trying their best to stay out of the spot market
while price levels adjust downward. This registers as a decline in
demand and the combined margin chart below indicates that
demand is indeed headed lower now after making a top last week.
Both middle meats and end meats contributed to the cutout’s
softening this week, but I’m really surprised that the middle meats
haven’t dropped more. The rib primal was down only about $4
this week and is acting like it doesn’t want to give up any more
ground.
So much for the theory that it was Labor Day buying that was
supporting the ribs. It seems like there is much stronger demand
for middle meats even outside of the holidays now. I guess it
doesn’t have to be a special occasion now to justify throwing a
ribeye on the grill. Retailers are not aggressively featuring middle
meats either and that means a lot of consumers must be stepping
up to pay non-feature price for middles. Those non-feature price
levels in the US for boneless ribeyes are now typically over $15/
pound.
Clearly someone has extra money they didn’t have at this time
last year. I do think that once retailers have finished restocking
after Labor Day, that wholesale middle meat prices will come
under greater pressure, but for now it is simply amazing how well
those prices have held up. I’m forecasting the Choice cutout to
come off in big chunks over the next few weeks and thus
perhaps reach the $300 level by the end of September. What
happens after that is very uncertain.
In normal years, we would see increased buying interest in
middle meats for the holidays kick in around early October and
thus lift the cutout. The big question in my mind is whether or
not that will happen this year. If it does, the normal fall rally in
the ribs and tenders will be starting from a very high level and
thus it would be reasonable to expect them to move to all-time
highs that exceed what we just saw in August. I just can’t
imagine it will go like that again, so I’ve got the rib primal
declining from now to December. Even using that very unusual
price pattern, I end up with an average price for the rib primal in
Q4 that is $83 higher than last year’s big number. If I went the
other direction and forecasted rising rib prices from October
onward, I would probably end up with price levels in Q4 that were
at least $300 higher than last year.
That is just too much for me to buy into at this time, but I wouldn’t
discount the odds that it may happen. This is 2021, after all.
Steer and heifer slaughter this week is projected at 500k since
packers are likely to keep the Saturday kill light in order to give
more workers a long weekend. Next week’s fed kill could be
closer to 465k. Those two short kill weeks will tighten up beef
availability some, but I don’t expect it send the cutouts suddenly
higher. What it will do is backlog several thousand head of cattle
and thus just prolong the wait for cash cattle prices to rise. Next
week, watch the middle meats for evidence they will move
rapidly lower and look for the futures to rebound somewhat from
its current oversold condition.
