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CME: Robust Lean Beef Demand, High Priced Imports Bolster Value

22 November 2019

US - Robust demand for lean beef and high priced imports have bolstered the value of beef end cuts and pushed the choice cutout far higher than most expected for this time of year, reports Steiner Consulting Group, DLR Division, Inc.

The effect of the gains on fed cattle prices has been noticeable but for the most part the increase has benefited packers bottom lines. According to our calculations, the packer gross margin for the week ending 16 November stood at $579/head, not as high as the +$600/head realized in early September but pretty close.

For those wondering about these calculations, please note we use the comprehensive cutout value of $234.26/cwt from last week as well as the weighted average fed cattle value of $183.06/cwt from the latest comprehensive cattle report. Drop credit for the week was $8.92/cwt live basis. But let’s come back to the focus of today’s discussion - the value of end cuts and contribution to the cutout.

On Wednesday, USDA pegged the value of the choice chuck primal at $195.83/cwt, $25/cwt or 15 percent higher than a year ago. The choice round primal value was last quoted at $193.68/cwt, $30/cwt or 18 percent higher than a year ago. The gains from higher chuck and round prices added about $14/cwt to the overall value of the choice cutout compared to year ago levels.

In contrast, higher prices for middle meats contributed around $8/cwt to the overall carcass gain. The following chart shows the overall contribution from rounds and chuck primals to the the cutout while the second chart shows the what portion of the y/y gain in the cutout is due to higher end cut vs. middle meat prices.

So despite the fact that choice tenderloins are currently hovering at around $1400/cwt and choice boneless ribeyes nearing $1000/cwt, gains in the value of lean beef cuts have been responsible for a big chunk of the improvement in the value of the cutout. There are both demand and supply reasons that help explain the increase.

On the supply side, we should point out to the current situation with imported meat and impact this is having on a specific segment of the market - fast food operators. Traditionally the US has imported a fair amount of lean beef from countries such as Australia and New Zealand in order to blend with fat trimmings generated when harvesting muscle cuts from fed carcasses.

Because this supply is frozen, it is especially suited for fast food operators. Frozen imported beef has the double benefit of being especially lean, which is the most expensive raw material, and it is frozen, thus helping during the grinding and patty forming process. But as China beef demand has exploded in the last three years, US end users have found a much more competitive market for lean imported frozen beef.

That competitive market has now turned into a bidding war, a war that Chinese buyers are currently winning. The price of 90CL imported beef at this time last year was hovering around $190/cwt. Today it is over $315/cwt - a 65 percent jump. The result has been a counter seasonal increase in the value of domestic lean beef (see chart) even as domestic cow slaughter is near seasonal highs.

Rather than bid on an ever shrinking supply, some end users have opted to source domestic lean fed beef cuts (chuck and rounds), thus putting them in direct competition with retailers and distributors that normally rely on this supply for inexpensive features on roasts, stew meat and steaks. And with cow slaughter set to seasonally decline in Q1, lean beef supply picture is unlikely to improve.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

TheCattleSite News Desk

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