What is in this article?:
- Outlook: $3-$5 Weekly Market Swings Are Becoming Routine
- Feeders are in a favorable position
2014 is shaping up to be highly significant year for the beef industry. New cattle market levels call for new perspectives on volatility, with $3-$5 swings are seemingly becoming more routine from week to week.
Experienced traders know to never get in the way of the market. Once a run begins, markets seemingly create a self-propelling momentum that’s difficult to break. And taking a contrarian position on a whim can prove especially painful.
Fed cattle prices are on a roll. For sellers, this year’s bullish market is extremely gratifying and helps dull the pain of an extended run of negative closeouts. The ensuing sentiment has understandably resulted in renewed exuberance about the business.
Last month’s column began with some discussion about updating the record books. The fed market average surpassed $148/cwt. during the fourth week of January and then began to fade. Just two weeks later, the market had retreated $8 with some semblance of choppy trade ahead around the $140 mark.
But, as mentioned above, markets can generate their own fuel. As a result, fed trade jumped $10/cwt. in just three weeks and managed to surpass $150 at the end of February – thereby establishing another new all-time high for the second month in a row.
With all that in mind, the broader context is even more impressive. That is, it was only four years ago – in spring 2010 – that the market jumped to $100 (Figure 1). While broader media coverage has focused on the string of new records in the equity market, fed cattle prices are running at the same pace since 2010.
Fed cattle traded at $99.81/cwt. the week ending April 9, 2010; that same week, the S&P 500 closed at 1194 and closed February at ~1860. Thus, this spring’s action equates to a 50% jump over four years. From an investment perspective, that’s the same as 10.7% compounded annual growth, nearly identical to the S&P500 during the same timeframe.
No doubt much of the cattle market’s surge has been driven by winter weather. Early 2014 storms managed to snarl up both fed cattle and the boxed-beef trade. The disruption pushed the Choice cutout beyond $240 in late-January. Once some normalcy entered back into the market, beef prices slipped back to $208 around Valentine’s Day. However, the market has since worked steadily higher and closed the month at $220 (Figure 2).
Positive wholesale beef action underpinned fed cattle trade in recent weeks. Additionally, there’s the ever-present tug of tight supply with every week that passes. And as such, packers have been actively hunting cattle and willing to pay in order to procure their harvest needs. Meanwhile, the futures market worked right in tandem with the spot market; the February Live Cattle contract went off the board with strong gains closing at nearly $152.