A few thoughts by John Nalivka: Sorting the complexity of the market
Carcass weights are a key issue to the industry today. While they are one-half of the production equation and this can be a problem, there is a positive aspect as well – carcass grade. On that account, the average grade since the first week of January is 87 percent Choice or higher. This is a primary driver of demand – quality. The problem is that more of that quality beef has to clear the market.
Since the cutout hit a record high during the week of May 16, it has fallen 56 percent through mid-July. At the same time, weekly beef production beginning with the first week of June through mid-July has increased 29 percent over the weekly average for April and May. With plant capacity returning a more normal pace in early June, weekly steer and heifer slaughter posted a 46 percent increase over the April and May. Plant capacity usage increased from an average of 67 percent in April and May to 90 percent from the first week of June through mid-July, a 34 percent increase.
There are plenty of moving parts to the situation since April 1 on both the supply and demand sides of the equation. I want to once again break out carcass weights. They obviously play a significant role in production as we assess markets.
Contrary to what many may think, weights were heavy at the beginning of the year, which even then posed a potential problem for the market. Steer carcasses started getting heavier in early October of last year and while they were not close to the record weights hit in 2015 at that time of the year, they were increasing over a year earlier. By the end of 2019, they were not only 9 pounds heavier than the prior year, but also 1 pound heavier than 2015’s record weights. Heifer weights were following the same pattern. I suggested to clients at that time and presentations that I gave that this may become a problem as the industry entered 2020.
Tracking weights into 2020, by mid-March steer carcasses were 36 pounds heavier than the prior year, but began declining with a steady pace for fed cattle slaughter. By mid-April, they had declined to averaging 22 pounds above prior year. But, in the face of plant closures and slowdowns, it only took 30 days to add 30 pounds to that 22 pounds and by mid-May, weights were up 52 pounds over prior year. For the week ending July 11, weights were 37 pounds heavier than a year earlier and remain record high as they have been all of this year.
Again, the market is complex with many moving parts and each of these moving parts plays an important role. Everyone in the supply chain needs to appreciate the role of each moving part.
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