PMC Market Update

Producer Press Packers To Pay Far More

CATTLE feeders press packers to give them even more money in the second explosive price rally in successive weeks. Last Thursday afternoon’s rally came after the breathtaking rally that ended October. That week saw cash prices leap more than $6 per cwt live and dressed from the prior week. After several weeks of struggling to make any gains, the market exploded to the upside. Cattle feeders were determined to capture some of the premium in the December live cattle contract and had priced their cattle sharply higher. Packers rewarded them by paying an average $117 per cwt live or $181.54 per cwt dressed in an active Friday afternoon trade. Packers were prepared to pay more because strong retail and export sales raised wholesale beef prices again.

The same was true last week. Cattle feeders priced cattle even higher. Early trade Thursday saw cattle sell up north at $120-121 per cwt live and $191-192 per cwt dressed. No trade had occurred elsewhere. Thursday afternoon was a completely different story. Another explosive rally saw prices average $125 per cwt live in Texas, $124.59 live in Kansas, $123.87 live or $192 dressed in Nebraska and $121 live or $191.74 dressed in Iowa-Minnesota (where volume was largest at 34,284 head). Colorado sold some cattle at $120 live. The rally meant Southern Plains’ prices have advanced $14 per cwt live in two weeks. They have advanced $17 per cwt dressed up north.

The startling spurt in prices the week before last meant the average live price was 12.3% higher than the same week last year and the dressed price was 11.0% higher. The rally was in sharp contrast to what occurred in October last year when prices plummeted four weeks in a row to their low for the year of $97.59 per cwt live and $153.93 per cwt dressed the second week of the month.

The differences this year are that cattle feeders have remained current in their marketings, carcass weights are well below last year and the futures market has been at a large premium to cash prices. Carcass weights increased in the week ended October 21. But steer weights were still 16 lbs below last year and heifer weights were 8 lbs below. Overall weights were 15 lbs below. The Dec live cattle contract Monday through Wednesday last week advanced 529 points to close at $126.60 per cwt. So cattle feeders priced cattle at $123 live or $194 dressed. The Dec contract though retreated 227 points Thursday to close at $124.32. So the cash trade began below this level.

Feeder Cattle Prices Ride Coattails

Prices for calves and feeder cattle meanwhile have ridden the coattails of strong beef demand and a premium futures structure for live cattle. Cattle feeders have been prepared to pay more for replacements because the futures out into April suggest they can lock in positive feeding margins. The result has been a surge in feeder cattle prices. The price of a 600-750 lb Georgia feeder steer the week before last averaged $133.49 per cwt, up 34.4% on the same week last year. The price of an Oklahoma City 700-750 lb steer averaged $150.94 per cwt, up 24.5% on last year.

The feeder and calf market continues to defy the seasonal trend toward lower prices, says Andrew Gottschalk, HedgersEdge.com. He notes that USDA’s official number for the feeder and calf supply outside feedyards on October 1 was 30.229M head. This is up from 29.379M head on October 1, 2015.

Cheap corn and a premium in the deferred live cattle futures continue to lure producers into placing more cattle on feed, says Gottschalk. Corn Belt producers will walk their corn crops to market via cattle and hogs. More cattle on feed will become part of the invisible supply, which is not reported in monthly Cattle on Feed reports. This supply will eventually overload the front-end supply.

Gottschalk’s biggest concern regarding this issue remains the late-winter and spring period of 2018. During this time, carcass weights might begin to exceed levels achieved during the late winter and spring of 2017. Remember that a late winter storm this past winter cratered carcass weights, he says.

Gottschalk calculates that front-end supplies (cattle on feed 150 days or more) project to increase 6% above prior year levels by December 1 and exceed 2017 levels by 20% or more by April 1. But if marketing projections are achieved, this category of cattle projects to remain below the previous five-year average into June of 2018, he says.

Forward Sales Slid In October

THE upcoming holidays normally produce more forward beef sales, particularly on ribs and tenderloins. But the opposite occurred in October. The last week of the month saw total forward sales (negotiated sales 22 days and up plus forward contracts) down 29% from the same week last year. This meant that weekly average forward bookings in October were 20% smaller than in September and 9% below the levels of a year ago. Most beef items showed significant declines in October compared to the previous month and to October last year. The six-week rolling average on forward bookings until the week before last was 5% below year ago levels. One reason for this though is that packers are forcing buyers to procure more beef on formula pricing, say analysts.

Overall sales the last week of October and for the full month were also below a year ago. The week saw a total volume of 6833 loads reported by USDA, 9% below last year. Average weekly boxed beef sales volume for October was down 6% from September and down 5% from October last year. Negotiated sales 0-21 days were 4% smaller than September and 12% below last year. But formula sales were even with the previous month and 1% larger than year ago. The entire decline in forward sales came in forward contract sales.

The reduced volume sales reflected lower slaughter levels in October as packers worked to preserve their margins by producing less beef than in September. The struggle to get more forward business was another factor. The three full weeks of September, which began with a holiday-shortened week, saw an average kill of 644,103 head per week. The first three weeks of October saw an average kill of 630,896 per week. The fourth week saw an estimated kill of 617,000 head. This was only slightly larger than the 613,732 head kill the same week last year and was actually smaller after taking much lighter carcass weights into account. All the month-to-month decline in the kills was in steer and heifer slaughter.

Kills Need To Rise To Match Demand

The reduced kills are contrary to what analysts say needs to occur in November to match the year-on-year increase in beef demand. Holiday product pricing will gain momentum soon, exacerbating the challenge to draw cattle from producer inventories, says Andrew Gottschalk, HedgersEdge.com. Recent carcass weight data would require weekly slaughter to exceed year ago levels by 13,800 head per week to produce the same level of beef production as a year ago. During the non-holiday weeks last November, weekly cattle slaughter averaged 615,000 head. An equivalent production level this November would require non-holiday weekly slaughter to average 628,000 per head. But given the substantial gain in beef demand versus last year, weekly slaughter at this level is insufficient to meet current demand, says Gottschalk.

As such, upward pressure on beef cutout values and live cattle prices is expected to extend through Thanksgiving week, says Gottschalk. A weekly production level of 641,000 head would be required to offset a 2% increase in total beef demand versus a year ago. Retail beef margins remain very favorable, he says. The composite beef cutout would need to advance 10% to minimize retail beef margins at current average retail beef prices. Retailers continue to feature beef aggressively. Gottschalk notes that Safeway in Denver last week featured Choice Colorado Angus Beef T-bone steaks at $5.47 per lb.

Packers meanwhile forced daily Choice cutout values sharply higher last week but they got little traction on Select prices. The Choice cutout the first four days advanced $4.95 per cwt but the Select rose only $0.68 per cwt. This widened the Choice-Select price spread to $15.09 per cwt Thursday, up from $10.46 the previous Thursday. The spread was $0.57 per cwt on August 31. Packers sharply increased their asking prices for ribs and tenderloins. But there was considerable buyer resistance to end meat prices, say analysts. Packers themselves admitted they are having trouble selling Select and no roll beef.

One positive for continued strong domestic beef sales is that consumer confidence in the economy is higher than for many years. The Conference Board’s consumer confidence index in October increased to 125.9 from 120.6 in September. This beat the March index of 124.9 and marked its highest level since December 2000 when it was 128.6. Another positive is exports. Export sales the week before last were 43% larger than last year and the largest since June 2013.

Grading Call Causes Confusion

USDA action regarding new technology in instrument grading of fed cattle carcasses in nine plants causes confusion among the packers using the technology. The instrument technology did not perform as anticipated in a production setting, says USDA. It identified the issue and implemented an adjustment to that instrument.

One packer says the directive could mean a five percentage point decline in carcasses grading Choice and a 25% decline in the number of carcasses grading Prime. Others say this won’t occur. The amount of Prime and Certified Angus Beef might decline slightly but not the amount of Choice. Packers are concerned however that USDA’s move sends the wrong message to producers who keep upgrading the quality of their cattle.

The directive comes at a delicate time for the wholesale beef market, as demand for rib items is highest right now. Any reduction in Prime and Choice grading might mean packers further raise the price of ribs and tenderloins, say analysts. Two key points emerge from USDA’s action. USDA graders continue to quality grade every carcass. Second, the grading percentages for Prime and Choice this year have closely followed their five-year seasonal pattern, albeit at slightly higher levels that have little to do with the new technology.
USDA’s action had its origins in June when nine plants operated by Tyson Foods, Cargill and National Beef Packing began using an updated version of vision technology (grading cameras). USDA had previously reviewed a prototype and approved the new technology. At that time, it performed as expected. Sixteen plants in total had until then been using an older version of the technology that started being used some years ago.

The updated version replaced LED-lit cameras with digital cameras. Packers who used the new cameras believed they would do a more accurate job in assessing quality grades. They say the technology and the software’s calibration was correct and accurate. But USDA graders after several weeks of the technology’s use reportedly determined the new cameras were not as accurate as USDA thought they would be. Graders began over-riding the cameras’ results, as they sometimes do, when they felt they needed to.
USDA had anticipated that the new technology would perform like its predecessor and would give the same results. But it says the new cameras led to slightly higher grading percentages, although some packers say they did not.

Technology Did Not Perform As Anticipated

Highly-skilled USDA graders apply beef grades in plants around the country, says Jennifer Porter, director of the Quality Assessment Division of USDA’s AMS, Livestock, Poultry, and Seed Program. These graders have the final call on each and every grade assigned to an individual beef carcass. In some plants, vision technology (often referred to as grading cameras) is used as an aid for the USDA grader when he/she makes the final call.

USDA reviewed and approved an updated version of the instrument technology for use in official grading at several beef processing plants, says Porter. However, it did not perform as anticipated in a production setting, she says. USDA identified the issue and implemented an adjustment to that instrument on October 27 in the plants using the system.

USDA graders will continue to exercise their ability to over-ride a grade call made by the camera that they believe is not accurate, says Porter. USDA will also closely monitor the grading camera’s performance to ensure it serves as a reliable aid in assigning the final grade, says Porter. CBW understands that USDA might revisit its review of the new technology.

The nine plants that used the new cameras are said to have represented up to 50% of total fed steer and heifer slaughter. Despite this percentage, it is unclear whether the new cameras caused grading percentages to go up or down. One packer says its percentages declined. It has for now stopped using all cameras and is relying solely on USDA graders to determine quality grading. Others have likely followed suit to some extent. If packers don’t like an initial grader’s assessment, they can rail off carcasses and present them for re-grading the next day. The irony is that instrument grading was introduced to reduce this practice.
Five-year charts of weekly grading percentages reveal that both the Prime and Choice percentages this year have been closely following their seasonal pattern, say analysts. They tend to be higher in the early part of the year, fall to their seasonal low in April or May and then increase again.

Packers say they don’t know of any producers who complained about the grading percentages from the nine plants. But they are concerned that a message might go out to producers that all the work they have done to improve the quality of their cattle isn’t being fully rewarded, they say.

NAFTA Talks Concern Exporters

BEEF and pork exports are booming this year, so much so that their year-on-year increase is two or three times that of production. But this success story is dampened by concerns throughout the red meat industry over the fate of the North American Free Trade Agreement (NAFTA). Canada and Mexico are vital destinations for U.S. beef and pork. Any change to NAFTA or a U.S. withdrawal from NATFA could have a huge impact on the U.S. red meat and livestock industries.

The latest group to voice its concern is the U.S. Meat Export Federation, which promotes U.S. meat worldwide and helps develop existing and new markets. USMEF has been highly successful in recent years on both counts. One of its key focuses currently is on maximizing the value of each cattle or hog carcass and putting the right cut in the right market, says new president Dan Halstrom. The more demand for U.S. meat that USMEF can create globally, the more packers can push cutout values higher and the more they can pay producers, he says.

USMEF is very pleased with the results it has achieved so far this year, says previous president Phil Seng. He remains CEO until December 1. Beef exports in volume are up 23% to Japan, up 8% to South Korea, up 15% to Hong Kong/China and up 75% to the ASEAN countries. Pork exports in volume are up 9% overall and are up 18% to Mexico, which is quietly becoming the most important export market for volume. But exports to Mexico are approaching a threshold that is of some concern, he says.

USMEF’s most imminent concern is over the NAFTA negotiations and how they might impact exports, says Seng. NAFTA has been a beautiful arrangement for the industry. Seng recalls how Canada and then Mexico reopened its doors to U.S. beef within three months of the U.S.’s first BSE case in December 2003. Even threatening to leave NAFTA is a mistake, he says. There is tremendous growth in Mexicans’ appetite for U.S. red meat, says USMEF regional director Oscar Ferrara. But the NAFTA negotiations are creating a lot of uncertainty and buyers are looking at importing meat from other countries, he says.

China Is Start Of A Long Road

The opening of China’s market to U.S. beef is the beginning of a long road, says USMEF senior vp Joel Haggard, who is based in Hong Kong. The U.S. has to try to sell the whole animal into the market because of China’s “natural beef” requirements (beef from cattle not implanted or fed ractopamine). This is a formidable challenge. USMEF’s focus is to go after large foodservice chains, he says.

One hope for progress is that a lot of Chinese buyers don’t have preconceived notions about U.S. beef, says Haggard. Buyers want to look at all the cuts and they see the value of featuring U.S. beef. A lot of under-utilized cuts such as the sirloin and shoulder are being made available. There is also great interest in certain offal items. None of the U.S.’s competitors has access into China for offal items. But there is still a discrepancy between USDA’s list of approved offal items for export to China and that country’s list, he says.
The Chinese market has been open to U.S. beef for 125 days, says Haggard. In that time, the U.S. has shipped 800 metric tons of beef. But that’s what the U.S. ships to Taiwan in one or two weeks. The U.S. has a 70% share of total chilled beef imports into Taiwan and offers a diverse portfolio of Asian cuts. This provides a glimpse of where China might go. China’s buying is all program rather than commodity buying.

USMEF is still finding markets within markets in both South Korea and Japan, says Haggard. Beef consumption in Japan is up 4% this year on last year. Exports of chilled beef to Japan are up this year and USMEF likes this because it represents more program than commodity buying, he says.

U.S. and other chilled imports are not likely to trigger Japan’s chilled beef safeguard this year but USMEF is watching the volumes very closely, says Seng. As for Japan’s 50% tariff on U.S. frozen imports, it speaks to the larger issue of the U.S. withdrawing from the proposed Trans-Pacific Partnership. Raising the tariff from 38.5% has had a significant impact. Matsuya, a 1000-outlet gyudon (beef bowl) chain in Japan, has said it is switching to using pork, says Seng.