Bearish Long-Term Cattle Outlook

While some cattle market analysts are saying the downside price risk for fed cattle is diminishing, there is little in the market to recommend a near-term rally.

Wholesale meat supplies remain burdensome; the market still favors feeding cattle to gargantuan sizes; any holiday buying by retail grocers or restaurants seems to be left to a few fill-in orders, and Canada and Mexico have the green light to exact hefty countervailing tariffs on US exports to these countries.  Both have said beef will be hit hard.

The USDA’s boxed beef price holiday rally, always an iffy prospect this year, now appears to be weakening seasonally.  Thursday’s choice cutout price was unchanged from Wednesday at $203.08 per cwt, while its select value was down $1.53 at $188.47.

The choice cutout was down $1.41, or 0.69%, from $204.49 a week earlier, and the select cutout was off $4.55, or 2.36%, from $193.02.

The fact that select beef is down harder than choice likely indicates that demand for choice remains relatively firmer than select.  Some holiday-related buying still is evident in the market.  The USDA even points to this when it says, “Choice rib and loin cuts (were) steady while select (was) weak to lower.”

Retail grocery beef features this year have been lackadaisical as margins for other meats appear to be larger than for beef.  Yet there have been holiday feature as demand for middle meats has been somewhat price supportive to the carcass value.  However, price declines in other primal cuts have offset gains in higher-value cuts.

Once holiday demand for the loin drops off, beef can look forward to Valentine’s Day demand in late January and early February as the only refuge in a storm of limp consumer demand until grilling season boosts demand again in the spring.

 

CATTLE WEIGHT AN ISSUE

 

Cattle producers are feeding cattle to increasingly heavy weights in an effort to garner more per head, even if they can’t get more per pound.  This works in the short run because current prices still are above the cost of gaining the extra pounds, and cattle can be held for a short time without hurting the bottom line significantly.

However, as everyone in the cattle and meat industry knows, the strategy comes back to haunt feeders in the long run through more beef and a rising number of cattle that have run out of time as their cost of gains exceeds the per-pound market price.  There comes a point at which feeders are just throwing good money after bad.

And once any remnants of holiday beef demand go away, packers may increase their discounts for Yield Grade 4 or 5 carcasses, rendering those extra pounds a detriment to feeder incomes.  If that happens, feeders could dump overweight cattle onto the market, increasing beef production at a time when the market doesn’t want it.

 

THE EXPORT PROBLEM

 

US export data for October continued to show significant declines in beef exports compared with last year.  Beef and veal exports were higher than in September, which is typical, but they were down 14.1% from a year earlier.

Beef exports to Japan, the US’ top export market, were down 41%.

Now, with Canada and Mexico set to impose punitive tariffs on beef and a host of other US products, beef exports could suffer in coming months.  Both countries have said no tariffs will be imposed if Congress repeals the COOL provisions in farm legislation by the end of next week, but it seems unlikely that Congress can act this fast.

With the export picture looking bleaker, domestic demand about to enter the winter blues with production seen continuing apace, there’s little that is long-term bullish about the beef market.

 

CASH FED CATTLE MARKETS QUIET AFTER MIDWEEK TRADE

 

Cash cattle markets were quiet Thursday after an active trade on Wednesday.  Live-basis prices down $4 to $5 per cwt from last week at $118 to $119.  Dressed-basis prices were off $5 to $6 at mostly $187 to $188.

Prices last week were down about $3.00 per cwt to a range of $123 to $125, mostly $124 on a live basis.  On a dressed basis, cattle traded at $190 to $192, down $3 to $5.

The choice/select spread widened Thursday to $14.61 from $13.08 on Wednesday, and there were 103 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Wednesday was $159.35, down $2.98.  This compares with the Jan settlement Thursday of $153.05, up $2.42.