Cull cows and the lean market
Cattle and boxed beef markets have posted significant gains over the past two weeks in a continuation of what has been an impressive recovery since the unsettled markets of August/September.
Negotiated fed-steers and heifers last week averaged $113/cwt., up $3.00/cwt. over the week prior on 50,000 head sold live. The dressed market averaged $179/cwt. on 14,773 head in negotiated trades.
The market recovery, although a grind, has been an earnest one. Last week’s 5-Area Weighted Average was roughly $2.00/cwt. below a year ago but there’s plenty of room for continued advancement considering the demand side of the boxed beef equation.
Fed-cattle prices are looking to eclipse the year-ago price this week, which has not been achieved since late July. Early reports on Tuesday had already indicated aggressive packer demand with some $115/cwt. live trade reported. The seasonal pattern of the last three years holds a decent bias for this 4th quarter rally with only 2017 posting a lower November price trend. The front-month December CME Live Cattle contract has been convincingly higher, currently $118.80/cwt., running $5.80/cwt. premium to last week’s cash market. It would take some seriously bearish thinking to argue against the fundamental logic of the recent trend.
Carcass cutout values were much firmer again last week with the CAB cutout increased another $2.32/cwt. to average $15.07/cwt. higher than a year ago. The quality spreads continued to place a heavy discount on Select items with a continuation of the Choice/Select spread above $25/cwt. and a CAB/Choice spread at $10.82/cwt.
The latest CAB subprimal report shows a more even price increase across the carcass with CAB ribeyes up only $0.08/lb., predictably slowing a huge 21% run-up since the September 9th summer low. Yet Tuesday action this week showed stronger rib prices again.
The lesser-discussed plate primal contributes just 5% to total carcass weight but led the charge last week with a $4.05/cwt. upswing. Fabrication of the plate yields inside and outside skirts with the latter, more pricey of the two currently fetching $7.10/lb., 14% higher than a year ago and 26% higher than the 3-year average largely credited to export demand.
90% lean rally, beef and cow price factors
While U.S. beef exports to China aren’t a factor today, we’re seeing trade impacts through global supply and demand for 90% lean grinding beef. China’s protein needs have shifted toward larger imports as their pork production is waylaid by African Swine Fever. Still, the country’s middle class has grown and along with it, an appetite for beef.
On the supply side the Australian cow herd has been reduced due to longstanding drought conditions, shrinking exports from that country, for which the U.S. and China are customers. New Zealand, traditionally a significant source of lean grinding beef for the U.S., has diverted much of their 90% lean beef exports to China this year while U.S. imports of the same have simultaneously declined.
These factors became evident in 90% lean prices in late July as the expected seasonal price slump didn’t develop as it has in prior years. The recent spike up to $2.45/lb. has grabbed the market’s attention more acutely and will factor toward end user input costs for ground beef ingredients.
Largely sourced from cull cow and bull meat, 90% lean product isn’t a major contributor to CAB cutout values from young steers and heifers. However, it enters the equation as yet another source of lean grinding material especially important as prices for the lean grinds escalate.
Peeled knuckles and eyes of round from the round are candidates for inclusion in 90% lean beef due to their inherant leanness, even in carcasses with higher ribeye marbling. These products from fed cattle sources can readily be included in the lean grinding mix, diverted from the whole muscle cut offering.
The Tyson packing plant fire plays into the higher market values of all items under the CAB carcass cutout but some of the current knuckle pricing should be attributed to higher demand for grinding material.
Since cull cows are the primary source of 90% lean one might expect to see a quick reaction in cow prices to accompany these recent events. Data through last week indicates cull cow prices have simply followed the seasonal pattern lower into the fall. In fact, this season’s decline has been more accelerated since July than the same period a year ago. Some packers harvesting a mix of young fed cattle and cull cows have dedicated more of their weekly supply to fed cattle since the Tyson plant fire, capitalizing on the huge margin advance that resulted. This appears to be the case for the month of August, but not September and October.
Total domestic cull cow harvest numbers in recent weeks show significant growth since August. An increase in weekly cow processing has averaged roughly 5,000 head greater than the same period last year, a 4.1% increase for the period.
This growth results from the combined effects of a larger 2019 total U.S. cow herd from which to cull cows compared to a year ago, and a particularly heavy rate of culling specifically in September/October compared to August.
The question that should enter our minds at this point is whether or not cull cows will become much more valuable in the very near term.
While we’d expect the cull cow market to be fairly sensitive to 90% lean beef prices there has been no increase in the value of cows to this point. However, the acute jump in the 90% lean beef price is such a fresh piece of news that any increase in lean cull cow prices may simply be lagging by a number of days.
Cull cow receipts tend to make up roughly 20% of ranch income on average. The underperforming cull cow market this fall has been as much a source of consternation for spring calving cow/calf operators as lower annual feeder cattle values. The factor of increasing 90% lean beef may provide a needed boost to cow prices but the suggestion that this trend should materialize remains simply an idea today.
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Packers have proven capable of not only large weekly production but of daily headcounts on par or larger than a year ago. The turnaround in the cattle cycle and the abnormalities of 2020 will further incentivize producers to shrink the nation’s herd.
With increased boxed product supplies comes a strong demand from the buying side to secure previously scarce supplies. These days, price is more favorable for end users. Fed cattle supplies are overwhelming and packer margins still leave room for boxes to be marked cheaper on larger production volume.
Federally inspected headcounts have seen rapid recovery since the lows experienced in April. For the past two weeks, the FI harvested headcount has been 86% and 89% of the same two weeks a year ago. Fed cattle prices have remained steady, averaging $116/cwt., with carcass weights steadily creeping higher.