click image to zoom Faced with escalating cattle prices and the need to force wholesale beef prices higher, US beef packers have significantly reduced cattle slaughter in recent days. The top chart to the right is familiar to regular readers of this report. It shows a 7-day running total of US steer and heifer slaughter based on the preliminary USDA daily slaughter statistics. For the seven days ending November 15, US steer and heifer slaughter was an estimated 457,000 head, 9.9% lower than the comparable period a year ago. Slaughter was particularly light last week, with just 66,000 head going to market on Friday, compared to the normal 95-100,000 and just 5,000 head slaughtered on Saturday. The immediate result of the cutbacks is visible in the price of the overall cutout and particularly for specific items, such as trimmings. The choice beef cutout closed on Tuesday at $194.30/cwt, $36.2/cwt or 23% higher than a year ago. The select cutout was quoted at $176.1/cwt, $26/cwt or 17% higher than a year ago. The choice - select spread at $18/cwt is about double what it was a year ago and also well above the five year average. Normally the choice-select spread increases in Q4 as demand for high quality beef improves going into the year end holidays while slaughter levels decline from summer highs. The recent increase in the spread, however, also reflects improving demand at retail as well as the significant premiums packers are paying for better grading cattle in Northern states.
It appears that for the moment packers have been successful in pushing through higher prices. End users have faced significantly higher beef prices for much of the year and either due to fear, or by design, some end users are caught with short positions coming into the holidays. And we are not talking about a short position in the futures market. Rather it means end users have limited their out front coverage of the supply they need to purchase, opting to fill more of their needs in the spot market. The decision to stay short bought makes sense given the ongoing uncertainty in global markets and constant chatter about another financial crisis brewing in Europe. The problem with being short bought, however, is that when packers suddenly cut slaughter, it dramatically reduces the supply of product in the spot market since standing orders get priority. In that situation, end users have no choice but to pay up to fill their needs. A good example is the price of 50CL beef trim, fat beef trimmings that are mixed into hamburger and ground beef. Prices for 50CL are now at all time record highs, surpassing the highs established back in April ahead of Memorial Day. The last time this happened was in the fall of 2003. Back then prices collapsed due to the BSE outbreak. Today, however, we are looking at fewer cattle out front and expanding export markets.