Analogies are always useful to make sense of markets – especially when they’re challenging. Thus far, the market in 2013 has possessed similar inertia to what occurred in 2009 – prices just can’t seem to get any upside traction. Clearly, this is a very different time with different circumstances, but the pattern surrounding the market invokes some of the same sentiment of several years ago.
At the close of 2009, I described the required work ahead for the market as a job of “grinding it out.” And here’s where the analogy comes in: the business possessed a likeness to being, “in the hedge rows fighting our way out to some open ground.” That seems to fit for where we’ve been thus far in 2013.
The market’s performance has been both frustrating and disappointing. There’s been some sloppy trading and tough slogging on a weekly basis (Figure 1) patiently biding time for better cattle prices. But open ground continues to prove elusive, leaving cattle trade on the defensive at all levels.
That’s been especially true through most of April in fed cattle. While April closed business on a positive note with the fed trade finishing the month at $128-9, that’s par with where cattle traded just over a year ago. Even more disappointing is that trade is sharply lower than where the April live cattle contract had marked trade as 2013 opened for business; recall that the contract began the year at $136 (thus the frustration and disappointment).
Choppiness and uncertainty isn’t unique to the beef complex. As noted in my column last month, many retail segments are experiencing a similar slowdown in spending. Consumer reticence is likely due to any number of factors, including inclement weather and higher payroll taxes. The flurry of earnings season reports in recent weeks from publicly traded companies has reflected a common theme: among many retailers, year-over-year results have been challenged because of the varying factors noted – especially weather.
All that said, last month’s column indicated the market seemingly had the potential to work higher. Warm weather would make a world of difference in terms of getting consumers out of the house; some hope of spring on the horizon would surely spark the market. No such luck.
That means lost opportunity during the past several weeks (more frustration and disappointment). While there’s likelihood of some pent-up demand that may provide a chance for a rally beyond Memorial Day, the window of opportunity is becoming increasingly narrow. Moreover, at this late date, duration of better prices will likely be short-lived only to be pressured by normal seasonality on the other side.
The drift away from higher highs thus far in 2013 largely stems from the inability of the wholesale market to get moving. The Choice cutout has remained relatively flat, chopping around $190 for a month now. Better prices at the feedyard won’t occur until there’s some better movement and upward price momentum in the boxed-beef market.
Signs of some better direction and/or firming sentiment in the short-run will largely hinge on performance of the middle meats (Figure 2). The round and chuck have largely carried the load the past six months or so. However, that’s beginning to rotate with some hope of warmer weather around the corner – that leads to both more featuring AND better restaurant traffic (the widening Choice/Select spread of late is also a positive sign). If that occurs, perhaps the wholesale market can get a shot in the arm and subsequently boost fed trade in May and June.
Frustration and disappointment about the market’s recent direction is probably greatest out in the country among those holding feeder cattle. All the factors discussed above have spilled back into the feeder market during the past several months. Meanwhile, given the large number of feedyard arrivals in March, it would appear that while feeder cattle supplies are tight, forage availability and feed supplies are even tighter.
Those factors in combination have seemingly turned leverage in the feeder market away from the seller toward the buyer. Softer prices on the buy side have substantially improved available margins in the swap and prospects for closeouts on the other side (Figures 3 and 4). That doesn’t ease the pain with current sales, but does improve the outlook for at least some semblance of relief in the feedyard sector’s current cash burn. It also speaks to the importance of risk management – some reversal at the CME will provide a great opportunity to protect deferred closeouts given the current buys.
To conclude, April has proven a sour month for the markets. There’s likely, though, some upside potential if and when weather gets back to normal. Either way, this year’s market underscores how challenging it is to navigate marketing decisions in the current business environment. So, as mentioned every month, reactive markets mandate the need to be vigilant about news, developments and estimates: remain informed and maintain objectivity around all aspects of the business.
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