CAB Insider: Premiums Adjust to Record Supplies
The supply of carcasses accepted for the Certified Angus Beef (CAB) brand flourished as never before from late July through late August, beginning with the first-ever week where the 32 collective CAB-licensed packers surpassed the 100,000-head mark for the brand. The primary building block for those 5 straight weeks of 100K+ runs was the increased total fed steer and heifer harvest, ranging weekly from 510,000 to 518,000 head. Those were the largest since the 2012 drought year’s calf crop was harvested in 2013.
Herd rebuilding now has packer harvest capacity nearly maxed out and, with more quality cattle in the mix, we’ve seen the largest weekly supplies of CAB carcasses on record. To the latter point, the share of cattle meeting the Angus-type live animal requirement was a robust 71%, compared to 64% a year ago. A rich marbling average among that eligible group sent the “accepted rate” under the brand’s 10 specifications to 32% for the period, generating that record run of CAB carcasses for the 5-week period. With this scenario so freshly logged into the database, it’s hard to know if it’s an anomaly or the start of a continuing trend. However, we can see in the USDA data that CAB grid premiums paid by packers for that period were reflective of the influx of qualified carcasses.
While the year-to-date grid premium had averaged $4.70/cwt. (carcass basis) until that time, the premium dropped to $3.04/cwt. from mid-July to mid-September, 21% smaller than the same period a year ago and an 83-cent difference. Also note that the high average CAB premium in the spring of this year was much higher than the previous three years due to the lack of market-ready cattle that was an anomaly of that particular marketing period. In the end, it becomes a little challenging to distill the true supply-and-demand price signal from grid pricing alone, given the nature of Mandatory Price Reporting and trade practices. Some packers change their grid price for CAB carcasses weekly, reacting to boxed beef demand, while some maintain a static CAB premium for periods longer than a year or even several years. The latest reported week of September 18th shows a quick rebound and an uptick in the premium with a move of 58 cents to average $3.46/cwt.
Another big harvest last week at 642,000 federally inspected cattle equates to about 514,000 head of fed cattle, pushing supplies through U.S. processors at a rapid clip. Granted, it was a week following a holiday-shortened harvest, but still the second largest weekly head count in 2017. The fed cattle trade occurred very late in the week as packers wanted to hold the market steady in the face of a choppy, yet generally emboldened week of CME Live Cattle futures activity. Fundamentals are a little difficult to tie directly to the positive movement in futures over the past two weeks, but a “wink is as good as a nod” as far as cattle feeders are concerned. The result was fortified asking prices, culminating in an average just pennies short of $106/cwt.
A key feature of the market at this point is the premium that the December Live Cattle contract currently holds above last week’s cash trade. Suppositions are surfacing about feedyards adding days to their near-term finished cattle to target a later marketing timeline. Should this develop, observers share concerns regarding currentness as carcass weights race upward to the expected November peak. For the time being, the cash fedcattle market has been locked in a fairly sideways trade with demand continuing to supply buoyancy, potentially averting the fall low of sub-$100/cwt. fed cattle values feared by many.
The boxed beef side of the equation was relatively steady last week with indications that restricted product movement into hurricane-affected areas accounts for some price weakness. Even so, the comprehensive, per-hundredweight cutout stands for the third week in a row at $193 and change. The rib primal captured most of the weakness on the CAB weekly report from Urner Barry, with a $5/cwt. decline. Heavy CAB ribeye rolls are a bargain at last week’s wholesale price of $6.04/lb., 9% lower than a year ago and cheaper for that week than in any of the five previous years. Holiday demand for that item shouldn’t begin in earnest until early October, but at this price, buyers should be stepping in. The loin complex shows a net negative last week due to lower top butt pricing while strip loin values increased from the year-to-date low of $5.35/lb. to last weeks $5.51/lb. Chuck items were strong movers, pulling up a net gain of $5/cwt. for the primal on the week while round items show a mixed price direction on the week. Grind blends of all types (73%, 81%, 93% lean) are trending seasonally lower, as expected, with CAB grinds following suit.
Ratio tracks leverage in fed cattle, beef markets
With fourth-quarter beef buying coming up quickly and all that the holiday beef market can bring to bear on boxed beef sales and fed cattle prices, it’s interesting to note the current positioning between the two. The accompanying chart shows the ratio of Urner Barry’s “Beef Index” number, derived from a simplified weekly boxed beef price divided by the CattleFax 6- state fed steer price and expressed as a ratio. A larger ratio and the associated higher trend line equate to boxed beef at a higher price vs. the fed cattle price.
While the displayed data begins in January 2014, the three years prior to that are relatively in line with 2014, containing far more ratio points below 1.6 than above. Thus, in expansion years 2015 through current, we’ve seen the margin of boxed beef over fed cattle prices widen. The 1.8 ratio is close to the highest charted in recent history, along with last fall and the peak near 1.9 in July of this year. Cutout values stand a betterthan-average chance at improving in the fourth quarter on holiday demand. Even if they don’t, the relatively poor fed-cattle position in comparison to the Beef Index suggests that the margin could be narrowed without damage to packer margins. However, as we have seen increasing fed cattle supplies close in on maximum fed cattle harvest capacity, we may not see leverage (a packer advantage) shift entirely away from this scenario for some time.