The choice beef cutout last night closed at $243.31/cwt, down $6.6/cwt from the previous day and the lowest daily close for the year. And it is conceivable that the cutout could decline even further in the next few days. The reason we saw that is that the rib primal, a key driver for the cutout during November, has more downside price risk now that retailers have largely covered their year‐end needs.
The rib primal value peaked at the end of November at $536.5/cwt, almost $100/cwt higher (+22%) than at the start of November, adding around $11/cwt to the overall cutout value. The big gains in the value of the rib primal, and to a lesser extent the loin primal, helped offset the weakness in round and chuck cuts last month. The chuck primal rallied hard in late October but by the end of November it was down $39/cwt or 17% from its peak. Chuck prices have continued to lose ground so far in December and the same can be said about rounds as well.
To be clear none of this is unprecedented. Usually end cuts lose ground in November as retailers fill the case with holiday items. Last year the rib primal value by the end of December was under $400/cwt. If that is the case again this year, then the decline would remove another $8.5/cwt from the value of the cutout. Loin primal value has managed to hold up fairly well, in part thanks to very strong prices for tenderloins. Last year the loin primal was a bit softer in early December but then rebounded into the year‐end.
Will that scenario play out again this year or will we see the market trend more like it did in 2019 and 2020? If the latter, then the loin primal decline would subtract another $3/cwt from the value of the cutout. But while the decline in high value steak cuts is somewhat to be expected once holiday needs are covered, in the past the shift to less expensive beef cuts has helped steady the ship. Last year both the chuck and round primal rallied about 20% from mid December to mid January and that rally added $21/cwt to the value of the cutout. For now round and chuck prices remain under pressure.
Forward sales for delivery in the next few months are currently running under year ago levels but last year we did not see forward sales pick up until later in the month, so there is still time for the situation to change. For instance, last year forward sales of trimmed choice inside rounds averaged around 49 loads a week in November, they then jumped to 72 loads the first week of December and then averaged 133 loads a week the rest of the month.
This set the stage for the rally in round prices in Jan/Feb, helping clean up spot supply availability. This year forward sales the first week of December are no different than the previous three weeks. The weakness in the cutout comes at a time when packers continue to pay up for cattle, resulting in significant margin compression.
The implied packer gross margin for last week was around $258/head, what we think is below breakeven and the lowest for this week since 2016. Cattle processing pace will slow down later in the month due to year‐end holidays, which should tighten up supplies a bit. But unless we see better pull from retailers in January, the tight margins may cause packers to rethink slaughter schedules for Q1 and may be prelude of the supply picture in the coming months, and likely years.
Daily Livestock Report - Steiner Consulting Group