There’s an underlying premise of investing in the stock market – time is your friend. While there’s bound to be some noise and price instability along the way, the overall trend is usually favorable. So, over the long run, investment in high-quality, well-managed companies largely results in a favorable payoff if you’re patient with the market.
Unfortunately, futures markets don’t work that way. Whatever your position, it’s defined against a specific time expiration. As such, the luxury of simply waiting out the market – whether you’re long or short – doesn’t exist on the futures side. The time stipulation can be especially nerve-wracking when the market sentiment is overwhelming and in opposition to your position.
February turns bearish
That brings us to the bigger story around February. For a time it seemed the market couldn’t get out of its own way – the first time that’s occurred in several years. All of a sudden, the trade assumed worries about a variety of factors around the consumer and beef’s pricing power.
That wasn’t totally surprising; after all, the cattle market headed into February being nervous anyway. As noted last month, “…there needs to be some caution regarding beef’s pricing power in the current economic environment… Only time will tell if that occurs in a significant way. If so, it will be translated fairly readily into the wholesale market and could provide a major challenge for this spring’s fed market.”
However, the extent of the plunge was especially sharp. The February live cattle futures contract traded near $129 in late-January (sharply off from the $134+ trade in early January). And, in a little over two weeks, the contract plunged another $5 to $124.
Cattle Market Weekly: Demand Whacks Cattle Prices
The sell-off was largely spurred by the torrent of negative sentiment about beef’s competiveness. Bearish concerns kicked in with increased focus on the influence of new payroll tax rates and higher gas prices on consumer spending. And indeed, the angst was supported by stubbornly stagnant wholesale prices through most of February. February’s cutout action was especially disappointing during the first three weeks of the month chopping along at about $183 – a level that tests well-established support (Figure 1).
All that bearishness started in motion a continual decline with sell stops being triggered on the way down; the slide ends up just feeding on itself. If you were holding a speculative position, being long the futures market, that action was especially painful. Do you jump out before it gets even worse, or stand firm because the market is too far stretched to the downside? That’s a difficult call when you know the clock is ticking in the background; there may not be sufficient time for recovery.
Beef complex shows its resilience
However, in recent years the beef complex has asserted its resilience over and over again (more on that later). And, in accordance, the story all began to change in the final week of February. Just about the time it seemed the market was entering a phase of new dynamics, beef trade began to show some signs of life.
As such, the February contract clawed its way back to close out the month at $128. Meanwhile, the April live cattle contact, especially important as an indicator of potential spring highs, traded all the way down to $127 (vs. encroaching $138 in early January), but has since worked back to the $130+ level.
Sure, some of that upside surge was fueled by a second winter storm that disrupted commerce and will prove to be a performance setback. However, renewed strength in the market was also initiated (finally) by new life in boxed-beef sales. The Choice cutout finished the month with a $5 weekly gain and is now trading at $190.
BEEF Video: BEEF Meat Market Update | Boxed Beef Trade
That provided the necessary jumpstart for feedyard managers to capture an additional $4-5 at month’s end, catapulting the cash market back to $127-8 (Figure 2). That’s compared to the previous four weeks of the cattle market trading at $124. And now the market begins to turn its attention to the April contract and potential for spring highs over the course of the next 60-90 days.
No doubt, pricing power and consumer sentiment will be key factors to monitor going forward. However, the supply scenario must also be monitored. And therein secures some friendly indicators for the market. Most notably, placements have been historically slow during the past several months. The graph below (Figure 3) represents running six-month feedyard placement totals (roughly one turn of cattle).
That population always peaks in the fall amidst fall runs. However, because of reduced supply and challenging closeouts, feedlots have proven particularly reluctant to feed cattle. The 2012 fall-run peak totaled 11.68 million head, well off historical fall placement totals. That reticence leaves a sizeable gap vs. previous years heading into peak demand season. Simultaneously, as mentioned previously, recent storms in the Central Plains will have an impact upon performance that will also cut into production over the near term.
Cattle market is poised to make another run
For now, the market has seemingly side-stepped violating major support trend lines, and appears poised to make another run at breaking through overhead resistance at $130+ in the coming months. As mentioned, that’s an important turnaround. And once again the beef complex demonstrates an incredible ability to be resilient and robust even under serious concerns. That’s largely the result of all the consumer work that’s occurred during the past 10-15 years. Final demand really, really matters!
It’s also a good lesson about exerting caution when the market seemingly gets swept with excessive sentiment one direction or the other. And the tighter markets get stretched (up or down), the faster and more sharply they seem to rebound.
That can make for some difficult rides if you’re a speculator, but for hedgers, volatility brings welcome opportunities for risk management. All that underscores the need, as mentioned every month, to be vigilant: remain informed and maintain objectivity around all aspects of the business.
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