March’s market action is best summarized by the expression, “and then some…” Stronger prices late in the month marked yet another new all-time record. That makes for the third consecutive month of establishing new historical highs.
January’s mark came late in the month when the fed market surpassed $148/cwt. The market then drifted back to $140 during the next several weeks; but stronger trade came at the last half of February pushing the market over the $150 hump for the first time. March’s action wasn’t quite as dramatic but, once again, strong action at the end of the month tacked on even more and scored the market another new high of $152-$153.
Figure 1 provides some insight into the fed market’s favorable action since last August. The fed market largely traded around $120/cwt. for about eight weeks last summer beginning in the middle of June. Then, coming out of those summer lows, a sustained surge in prices has been in the works since August. That trend has established the upward channel creating higher highs thus far in 2014. From a broader perspective, Figure 2 depicts the market’s run on both the fed and feeder sides since 2009 (the beginning of the longer run breakout to the upside).
New records thus far in 2014 are important benchmarks. Perhaps more important, though, are some of the dynamics behind the market. For example, during the final week of February, the market looked poised to trade in the high-$140 range. Packers were offering bids of $149 early in the week. Cattle feeders resoundingly passed and successfully demanded higher prices which, in turn, they quickly received. More surprising, though, is the fact that packers anted up while wholesale values were stagnating in late-March.
Undercurrents are swirling around basis
However, what’s especially significant about 2014 are the undercurrents swirling around basis (cash minus futures). Figure 3 illustrates nearby basis trends (high, average and low) during the past 10 years vs. 2014. Note that 2014 basis levels are running at all-time highs and surpassing the previous $5+ record established back in 2004 amidst the market’s struggle to normalize following BSE. Strong basis represents hyper-competitive action among buyers to secure supply. That competition is propelling the market to new highs discussed above.
While that’s favorable, it also makes marketing and scheduling plans somewhat challenging for cattle feeders. Clearly, there’s incentive to sell into that basis (the very point of strong bids). But it also means digging back into the feeder market to procure replacements (more on that below). Moreover, the enduring question revolves around how much fuel remains to drive the market further into new territory with lots of spring left in the offing.
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History serves as a useful guide in answering that question. That said, several weeks ago, an Industry-At-A-Glance chart detailed some historical perspective of spring highs vs. the January average. Historically, the average jump from January to the eventual high is around $8/cwt., but has been as high as $17/cwt (2011). Given that January’s market averaged $142, the spring high expectation puts the market somewhere around $150. The complex has now exceeded that mark, but is still well within the typical range of previous years.
In light of tight supply, though, the market seemingly has room to run higher yet. That’s especially true given that peak seasonal demand hasn’t yet occurred. Moreover, that pull could prove especially favorable in 2014 stemming from pent-up demand to overcome cabin fever, get outside, and fire up the grill. All seems favorable right now. The cash market hasn’t yet violated the support. And declining pork supply will boost beef’s competitiveness in the meat case.
However, boxed-beef prices seem tired. Seemingly, there’s some price resistance in the upper $230s when the wholesale market stalled out in late-March. The next several weeks will be especially critical to monitor as weather improves – it will serve as important gauge of how consumers behave as they wake up from an extended winter.
As I alluded to above, feedyards have been busy procuring replacements. Following December and January’s swift placement action, February resulted in an even faster pace of transactions. In fact, February placements were 15% ahead of last year. In total, the three-month placement total equals 5.36 million head – 475,000 head larger (9%) vs. 2013.
That’s especially important as we progress into the later months. As described last month, the nation’s feeder cattle supply outside of feedyards is some 750,000 head smaller (3%) compared to last year (Figure 4). In sum, cattle feeders are pulling ahead available supply, which will only serve to confound the hunt for feeder cattle in the second half of the year.
There are a number of new dynamics at work within the market and across the business. Trying to chart future direction is challenging in that environment. To be sure, there’ll be some surprises ahead. As noted last month, “The market will continue to wrestle with signals around beef demand, tight supply and increasing requirements for capital.”
With that said, as always, producers are well served to remain fully informed, stay disciplined and be determinedly objective to ensure successful decision making going forward.
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