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.
Feeders are in a favorable position
As mentioned above, cattle feeders find themselves in an especially favorable spot. Consider that during August and September, feedyards were largely paying between $150 and $160/cwt. for yearlings against a mostly-$131 February live cattle contract. Even at those levels, the cattle crush was highly favorable and has only gotten better since. (The only real hit in recent months has been in the price of natural gas, which is required to sustain steam-flaking operations.) Therefore, this recent run starts 2014 off being highly constructive, creating an especially positive note to closeouts the industry hasn’t seen in a long time.
That extra cash proved fortuitous for wheat grazers and other winter programs. The weather was not only disrupting beef trade; storms and cold were also wearing on wheat pasture and burning through available forage inventory for all stocker programs. So, while the market was providing some prosperity, it was also providing an opportunity to stock up on available replacements.
Feedyards proved willing buyers and, thus remained busy receiving cattle. USDA’s February Cattle on Feed report indicated January placements to surge 9% ahead of last year’s pace and the largest January placement rate since 2006. Perhaps more importantly, the six-month placement total is now running 1% bigger than 2013.
All the while, the nation’s feeder cattle supply outside of feedyards is some 750,000 head smaller (3%) compared to last year (Figure 3). Therefore, January’s activity tightens up available feeder cattle supply even further in coming months.
Weather has been the major theme of the past several months. Clearly, that’s impacted the production side of the equation. What’s most important, though, is the consumer and how this may all influence purchasing decisions in coming months.
• On one hand, the favorable outlook says consumers possess cabin fever; thus, there’s some pent up demand for them to get out of the house, spend and enjoy themselves – all good for beef.
• One the other hand, there’s the more concerning outlook that higher utility bills will take a major bite out of their propensity to spend – not so good for beef. That all remains to be seen – consumers are generally feeling better but gains are slow and steady (Figure 4).
Either way, consumer behavior is the key factor going forward. It will dictate beef movement, futures markets and the overall tone of the spring market.
As mentioned last month, 2014 is shaping up to be highly significant year for the beef industry. New market levels call for new perspectives on volatility: $3-$5 swings are seemingly becoming more routine from week to week. The market will continue to wrestle with signals around beef demand, tight supply and increasing requirements for capital.
That brings us around to the ever-increasing need to be vigilant about all influences upon the business, objectivity in decision making, and the requirement to keep fully informed.
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