Beef Wraps

Once again, it was “steady as she goes” in the cattle and beef
complex. The Choice cutout lost only $0.46/cwt. this week and
the Select was down $2.17/cwt. The cash cattle market
averaged about $0.50/cwt. below last week’s average. The
futures market moved about $1 higher on the week, with all of
that coming on Friday once market participants recognized that
packers were paying just a little more for those late clean-up
cattle purchases. Most of the softness in the Choice cutout was
driven by the loin primal, while the round gave the most support.
It was a little surprising that the recent small kills didn’t help the
cutout this week and that could be an ominous sign for next week
when much bigger production needs to clear the system. This
week’s fed slaughter is estimated at only 478k, down about 20k
from the week before and well below the 520-530k range that
was prevalent before the holiday.

I expect that packers will throttle back up to 530k next week. The
Saturday kill was quite large at 92k, of which about 80k was
steers and heifers. We should have a couple more weeks of
really big steer and heifer slaughter before kills start to taper
down near the beginning of October. Based on past placement
patterns, I’d look for weekly fed kills during October to average
around 500k per week, which is a pretty big drop from today’s
level and thus beef availability is likely to tighten up moving into
Q4. That may or may not mean higher cutouts, since there is a
chance that beef demand will be softer that what we saw in late
summer. Packer margins improved about $20/head this week to
average $189, as last week’s cheaper cattle purchases helped
the bottom line.

My forecast has the cutouts easing a little more next week as
larger production weighs on the market. The combined margin
made a little turn higher this week, but I am reluctant to call this a
bottom. If it is a bottom, it is happening at a higher level than has
characterized other recent bottoms. It could just be a head-fake
and next week’s combined margin could continue lower. Now
that summer is behind us and the kids are all back in school, the
post-COVID party atmosphere is done and it will be interesting to
see if beef demand erodes as a result. Some of the macro
variables got a little better this week as gas prices continued to
fall and the stock market posted a positive week. In the Southern
US, gas prices below $3/gallon are becoming commonplace
again. That will please all of the pickup truck and SUV drivers.
Will they spend their gas savings on a nice juicy steak to
celebrate?

I doubt it, but a little extra change in consumer’s pockets
certainly won’t hurt demand. We should look for middle meat
demand to improve in October and November, and much of that
will be centered on the ribeyes and tenderloins. It’s not a given,
however. Recall that last year rib prices moved lower right
through the fall and didn’t really exhibit much of a holidayinduced demand bump. We often see better end meat demand
heading into October and that should be the case this year, but I
expect that the price gains will be moderate at best. Trimmings
markets likely work a little lower as demand through QSR
channels should be softer as fall begins. Actually, the safest,
and easiest, forecast would be just to call everything flat for the
next month or two. That is pretty much they way most items
traded throughout the summer.

The current forecast has the Choice cutout down in the low
$250s by the end of October. At that point in time I’d expect
cash cattle to be in the low $140s—not far different from today’s
pricing. Futures traders are more optimistic than that, with the
Oct contract settling near $146 this week. ERS released the
trade data for July this week and it showed total beef exports up
3.2% YOY and down 2.5% from June. Export volumes are
running above recent years at a time when US price levels are
also stronger than in years’ past, so that provides pretty strong
evidence that international demand for US beef is healthy. I
think we will see some modest softening of exports in Q4 from
current levels, but they could still be at, or slightly above, last
year. USDA still hasn’t repaired their weekly export reporting
system, so we remain in the dark about current export activity.

Steer carcass weights were unchanged this week at 904, and
have been slow to rise coming out of summer. The DTDS
weights remain at stubbornly low levels and that keeps me
thinking that feedyards are not backlogging any cattle at present.
Kills have just been too strong for that to happen. We should
see stronger weight increases in the next couple of FI data
releases because they will cover the recent holiday-reduced
kills. It is hard to imagine cash cattle prices slipping too much
given how bullish the weight picture looks. Next week watch the
cutouts to see how they perform under the weight of bigger
production. If they hold steady or advance, then that would be a
positive demand sign. More likely, the cutouts slide lower and
put pressure on packers to get cattle bought cheaper next week.