AG Bull
Tommy Grisafi is the main host and content creator for Ag Bull Media.
The Ag Bull Podcast showcases agriculture's top talents in a long-form video format. The Ag Bull Trading Podcast is a deeper discussion of trading with analysts and key players in agriculture nationwide.
AG Bull
Fat Tuesday | When scarcity meets weight: Can U.S. beef demand outrun its own record prices?
Record-tight feeder supplies meet record-heavy carcass weights and a falling cutout, creating a tense setup where front-end inventories swell just as seasonal patterns should ease. We unpack the Mexico border closure, regional cash spreads, demand risk at record retail prices, and the surprise shift in futures positioning.
• impact of Mexican border closure on feeder supplies
• divergence between Southern Plains and Northern on-feed inventories
• placements down, marketings down, front-end supplies up
• record carcass weights and feeder leverage erosion
• blended cutout’s sharp August rally and September slide
• Nebraska premium flipping to a discount versus Kansas
• consumer demand at record retail beef prices
• hogs open interest topping cattle and what it implies
• cheaper feed from larger corn, wheat, and sorghum supplies
• macro overhang from a possible government shutdown
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Thank you, Tommy G
Well, good good afternoon, everyone. Tommy Gersafi, Eggbo Media, Eggbo Podcast. This is your Fat Tuesday show coming to you on a Wednesday. We got the one and only Mr. Mike Sands. Mike, we had a a little mishap. I just spelt a drink, and so we had to restart the show. And you, from what I understand, that happened on your morning call. Anything you want to tell us about on a coffee mishap this morning?
SPEAKER_00:No, we had to delay it at least for a couple of minutes. One of the guys on the on the call ended up wearing his giant-sized cup of coffee this morning. So we had to we had to delay for a little bit for a cleanup. That's what we did here.
SPEAKER_01:It was a good thing we weren't live. I was like, I'll just let it sit there. I'm like, no, I got to clean this up. Speaking of cleanup, we got we got a cattle train that just won't stop. Yesterday afternoon, end of the month, end of September. Today is October 1st. We had the cattle market traded down at one point yesterday, and the feeder cattle, this show called Fat Tuesday, feeder cattle rocketed back up, closed on the highs, traded up in after hours, opened up lower today, and then rocketed back up. Let's talk with a little commentary on just the overall what's going on in the cattle market, and then we'll get to the slides, Mike.
SPEAKER_00:Well, I think from an overall standpoint, we continue to work with historically small supplies of fed cattle available. We've been reducing numbers uh for five or six years now. Uh and overall feedlot placements over the last few months have come down pretty sharply. Uh, the expectation is that numbers stay really tight, and of course, the Mexican border remains closed as a result of the screw worm issue in Mexico, and that has significantly reduced feeder cattle supplies. Uh, the end result has been a sharp drop in overall on-feed numbers in Texas. I think at the beginning of September, their on-feed numbers were down pretty close to 250,000 head. It's historically small numbers, while at the same time in the north, thinking about Nebraska and Iowa, for example, we have record numbers on feed. So a huge divergence within the industry in terms of fed cattle availability.
SPEAKER_01:Mike, this kind of what happens to we've had, it seems like every other year we've had major droughts, and we have drought in Texas and we have a lot of cattle up north. And I remember North Dakota, I want to say in 21 up north, not just North Dakota, but the north had a big drought in 21, and then all the cattle were down south. But we locked all these cattle up in Mexico, and they're not coming up anytime soon, it seems like, correct?
SPEAKER_00:Surely looks like that's going to be the case or has been the case. The border closed initially in late November of last year. Uh, it opened for a little bit uh in the spring months of this year, uh, and then reclosed again indefinitely at this point in mid-July. So if we go back to that late November timeframe and count from there to where we are in the calendar here at the beginning of October, total feeder cattle imports from Mexico are down well over 900,000 head over that timeframe. And of course, a lot of those cattle are going to be fed in the southern plains. And that's what this chart really reflects is that decline in feedlot placements that really started uh in April and is continued through the summer months, just aggregating numbers from April through August, total feedlot placements during that time frame are down about 7%, somewhere in the area of 625,000 head. And that's built that smaller feedlot placement number is built an expectation that Fed cattle supplies, as we move into the fall and winter months, um, those Fed cattle supplies will be substantially smaller. But there is a big but associated with that. If we go to the next chart, Tommy, it will show us that overall Fed cattle marketings have declined basically in lockstep with the decline in feedlot placements. So from that April through August timeframe, overall marketings are also down about 7%. And that's pretty close to a 675,000 head decline in overall marketings. So we put cattle on feed during that timeframe, reduced numbers on feed, but we've also reduced marketings. And the end result is we've simply delayed that front-end supply of cattle and pushed numbers forward. So instead of looking at smaller feedlot inventories and declining Fed cattle supplies, we've kept that feedlot inventory at some relatively high levels. At least we haven't seen the drop in inventories that one would anticipate as a result of the decline in overall feedlot placements. So this front-end supply of cattle, as as noted in the next chart, has moved substantially higher going from August to September, increased almost 200,000 head during a time frame when we'd expect those front-end supplies to get smaller. If you look at the seasonal pattern in terms of that available supply of cattle, it typically peaks out in April and May and then declines all the way into the summer and fall months. This year we're looking at a counter-seasonal increase going from August into September, October, and November. As of October 1, it looks like this cattle on feed over 150 days. This front end supply is up pretty close to 500,000 head, maybe a little bit more than that compared with a year ago. It's record large for the date, and it's up over 21%. So big numbers on feed, and they're they're pretty heavy as well. Carcass weights are at record levels. Uh as the next chart will suggest and confirm, we're looking at kind of a weighted average of fed cattle weights here in late September, early October that are up around 925 pounds. A seasonal increase would push those weights at the peak this fall, somewhere in that area of 940 pounds. Obviously, those are historically heavy weights. So we've got big numbers on feed, we've got heavy cattle on feed. I think there's some risk that it may continue to erode the leverage that the cattle feeder has, has been able to enjoy in recent months and reduce some of his flexibility in terms of marketing those cattle. The other part of the issue in terms of the value of those fed cattle, if one looks at uh our next chart, which is the decline in overall uh beef prices, uh we did see a really sharp run-up in the overall blended cutout. That's the weighted average of choice and select cutout values from around 360 at the beginning of August to something over$400 at the end of August and very early September. At the beginning of September, from that record high level, we've seen the blended cutout drop now by almost$40. So, as far as the Packers concerned, uh the value of that animal out there is obviously worth less to him than it was 30 days ago. So we got big numbers, we got heavy weights, and we got a declining uh beef market, all of which likely translates into some continued weakness here in the near term as far as Fed cattle prices are concerned. One other thing from a geographic standpoint, and our last chart here this afternoon is the price spread between cattle on feed in or Fed cattle prices in Nebraska versus Kansas. At the beginning of July, we were looking at price levels in Nebraska, a$10 premium to what they were in the Southern Plains. By the time we moved to the end of September, price levels in Nebraska had moved to about a$4 discount to the Southern Plains. Now that's we've been here before, but that's a relatively wide discount, and it reflects Fed cattle availability. We have record numbers on free on feed in Nebraska and Iowa, and historically small numbers on feed in Texas, and that's the key factor behind that that wide price spread.
SPEAKER_01:Incredible. I'm gonna ask you a couple silly questions, and maybe they're not silly to people listening to the podcast. I'm gonna get rid of these charts and just put you up real quick, folks. We're we we're meeting with Mr. Mike Sands, MBS Research. Mike, I this is such a silly question. I hear you guys talk about it a little bit on the morning call. What's happening to all these cattle in Mexico? So they used to come over the border and then we would take it from there. They're not coming over the border. Do they have the the processing ability to uh take that fat animal and uh package it up and turn it into ground beef, etc., and steaks?
SPEAKER_00:Is that a silly question? No, it's not a silly question.
SPEAKER_01:And well, then I'm gonna keep going until I ask Paloozy.
SPEAKER_00:Well, from an overall standpoint, over the last couple of years, we've brought in um somewhere around a million two feeder cattle each of the last two years. And as alluded to earlier, numbers this year are down well over 900,000 since the border initially closed in in late November of last year. So obviously, those cattle are still in Mexico. Now, total supplies down there, since they've been under drought conditions over the last two or three years as well, total supplies might not have been as big to begin with as they were the last couple of years. But the bottom line is they are either on grass still in or in a backgrounding program in Mexico, or they have put been put into a feed yard in Mexico per se. So the end result is maybe to some extent, the we are developing a fed beef production competitor, if you will, in Mexico over time because of the border closure. They're going to, in all likelihood, develop their feeding expertise on pretty consistent with with how we feed and produce fed cattle in the U.S.
SPEAKER_01:And the longer this goes on, the more we're giving Mexico the chance. So we could look back five or ten years from now and say, boy, Mexico's really good at uh raising animals and then processing them and then exporting them. You'd be like, Yeah, you know who forced them to do that? Us, correct?
SPEAKER_00:I think that's exactly right. It may be a long time before we bring in a million two feeder cattle from Mexico again for a couple of reasons. They've probably downsized their industry just a little bit, but in addition to that, we're they are being forced, if you will, to figure out how to how to feed cattle, feed them efficiently, and and produce and export beef to the U.S. Okay.
SPEAKER_01:What uh what what should be a question that people should be asking, whether it be a consumer or a trader, what what's something on your mind that's so obvious to you that people aren't asking? Is it does that make sense?
SPEAKER_00:Well, I I think there are some concerns within the industry that since beef prices are at record high levels, that that may very well have some impact on consumers' willingness to purchase beef, whether it happens to be in a restaurant or or in a retail store. And of course, that that is a concern longer term in the sense that beef prices are high relative to pork and chicken, and as a result, could negatively impact overall demand for beef. But at least at this point, recognizing full well that price levels are record high, our production is pretty small as well. And it's not apparent yet at this point that there's been any big negative impacts on beef demand.
SPEAKER_01:So we're just the consumer is comfortable. What would you I Google it sometimes before I talk about beef, but I'm gonna go with that. The average price of ground beef in America is$6 a pound. You probably know that off your head, but it it it's about that$585,$6. And the consumer's just comfortable doing that. Recently, you said something this morning on the morning call, and I do listen. You're gonna be like, you're always talking, you're not listening. Did you say open interest is higher in hogs and cattle, and we don't normally stay that way for long?
SPEAKER_00:Yeah. Last, of course, we got a very bullish, if you will, hogs and pigs report week or so ago. I think a week ago, Thursday. The end result is we've got fewer hogs out there than what the trade was looking for. Uh, and as a result, there's been some pretty significant increases in in overall hog prices, obviously, some pretty strong buying interest as far as futures are concerned. And we end up with something on the order of 376, 377,000 open interest in hogs, which is slightly bigger than cattle. Um typically does not compare that way. Uh, and when it does, doesn't very often stay that way.
SPEAKER_01:We'll see what that all means. Okay, everyone, we're meeting with uh Mr. Mike Sands, MBS Research. Probably the busiest he's ever been, although he always stays busy. It's not like he ever tries to uh take much time off. But your uh this show is called Fat Tuesday. We're doing it on a Wednesday. Yesterday was the end of the month. Today is the first day of October. It's the first day of the beginning of the quarter. I do have one last thing that should make you giggle. This video allegedly our government shut down, and this is a picture of what it looks like. And I want to hear your opinion on what this does, Mark. They shut the shut the money off like a parent calling a college kid and cutting off the credit card. What's going on with the uh government shutting down? I do know it uh it does affect uh GDP and stuff like that, Mike.
SPEAKER_00:Yeah, I think from an overall standpoint, uh at least uh the Congressional Budget Office in terms of their assessment of the shutdown back in 2013. We were shut down for several days, if not weeks, that it had a negative impact on GDP. It took about a half a point off of domestic growth at that at that point. Um I'm not I obviously I don't know how long it's going to be closed. The longer it's closed, the bigger the impact, obviously. Um, but at least at this juncture, uh it's it's not positive as far as economic growth is concerned. Yeah, it's interesting.
SPEAKER_01:All right, we'll do this again next week. We also were proud to announce we have premium content available. Folks who like videos like this, they could subscribe for$25 a month,$250 annually, and they'll be getting videos that uh the general public can't get. This will be one of those videos that's made exclusively for NASVIC clients and friends of AgBull Media, AgBull Trading. And with that, tell all the good folks down there in Memphis. I said hi. I I feel better now about spilling my drink before we were actually recording. This is the second time we did this, and apparently I'm not alone there. We have the government closed, we have open interest high, the cash prices in in cattle are coming down when we uh see those afternoon reports, yet the feeder market's still rocketing higher. With that, God only knows where prices will be when we do this again next week, correct?
SPEAKER_00:Uh no question about that. Lower feed costs coming out of uh yesterday's stocks report probably doesn't discourage people from paying up for feeder cattle either, along with the tight supplies of feeders.
SPEAKER_01:Yeah, and even though I thought we're ending the show, I want to talk about that because when I was in Kansas with you in Dodge City, I've never seen it that green. Not that I've spent that much in Kansas time in Kansas, but I know that a lot of time they have to buy feed because it's you know it gets dry out there. And then that folks, what that we got are talking about here is the cattle aren't coming in from Mexico. There's lots of green grass everywhere, not everywhere, but there's a lot of green grass, and we have plenty of corn, and that's that magic number that the government likes to slide back and forth, that feed and residual number, right, Mike?
SPEAKER_00:Yeah, absolutely. Overall feed disappearance last year, based on that stocks report, was overall feed usage was not as large. And I think in terms of their overall estimates, they gave us a little bit bigger production number as well. So uh if you just carry those numbers forward, it it means that the total available supply of corn this year uh is is going to be up a couple hundred million bushel more than what the trade had anticipated. And of course, we had big wheat crops and and we have a big grain sorghum crop out there as well. So feed is abundant and it's it's relatively cheap. Not not good, of course, if if you're a seller of those commodities, but from a buyer's perspective, um, this is the cheapest feed has been for quite some time. Yeah, it's very challenging.
SPEAKER_01:Folks, if you're watching and you're out there combining, we wish you a safe harvest. I know I've received three, four texts here just while we're recording this of people selling some grain off the uh combine and wanting to replace it with that. Mr. Mike Sands coming to you from Memphis, Tennessee at the uh Memphis office at Nesvik. I can't I can't speak. Mike Sands, Memphis, Tennessee, Nesvik trading. That's a lot of a lot of stuff there. Tommy Grossoffi, I'm in Valparaiso Indiana today. I'm heading down to Nashville today uh to see the good folks at Nesvik. This has been your Fat Tuesday episode. We got through it on two takes. Mr. Mike Sands, thank you so much. We'll do it again and uh see you next week, my friend.
SPEAKER_00:Looking forward to it, Tommy.
