Lessons from the 2015 cattle market wreck

Lessons from the 2015 cattle market wreck

“Just because we can, it doesn’t mean we should,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. That’s the primary lesson he believes can be gleaned from the late summer-early fall market slide that sucked at least 20% out of the value of calves in a matter of weeks.

He’s referring to the genetics and management tools that enable feeding cattle to extraordinary finish weights. Study the record carcass weights of late with the dog-eared, bell-shaped statistical curve in mind, and it’s easy to believe various reports of steers weighing as much as a ton. Though there were other contributors, the backlog of overdone cattle fueled the price slide.

“What happened, especially for fed cattle markets, was a necessary correction to provide the market signals to fix a problem that developed over several months due to a lack of proper market signals,” Peel says.

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“Feedlots were pushing carcass weights for months, abetted by packers, since both had individual as well as market incentives to offset lack of cattle numbers with additional carcass weight. However, there are both biological and market limits to how far weights can be pushed before, relatively abruptly, hitting a wall.”

Without the usual market signals — heavyweight carcass discounts and only modest ones for Yield Grades 4 and 5 carcasses that came too slow — Peel explains there was no incentive to add fewer pounds until cash prices dipped below the cost of marginal gain.

“It is pretty clear that we can continue to make steaks bigger, but it is not at all clear that we can sell them profitably,” Peel says.

At the same time, Peel says there are other evolving big-picture issues that merit consideration. There’s the added volatility created by the global economy, for one thing. For instance, one reason U.S. beef exports continue to struggle year over year — while domestic beef demand continues to maintain its ground — is the strength of the U.S. dollar and related global economic factors.

Closer to home, arguably, it’s also getting tougher to ferret out what cattle are worth. “If you buy cattle today, it’s difficult to use futures to manage risk,” Peel says. “The futures market [for cattle] came unhooked from the cash market more than a year ago.”

Suffice it to say, a growing number of folks are questioning the relevance and value to risk management of cattle futures that are whipsawed by non-market forces like mechanized, high-frequency trading, and non-fundamental factors such as the aggregate sea-shift changes of non-commercial positions.

The impacts, Peel explains, are magnified in thinly traded markets like cattle futures, especially feeder cattle futures.

Arguably, cash markets continue to lose transparency, too, as cash trade dwindles and other transactions occur beyond the boundaries that require reporting.

Although easier said than done when dollars and hope are evaporating, Peel says the latest wreck is also a reminder to remain calm. Folks who bailed out amid the market decline missed the price rally that began the second week of October. About 10 days into the price rally that started the first full week of October, Peel believed that prices would recover further — as long, that is, as the heavy cattle continued to clear the market.

Peel also pointed to the value of gain — it didn’t budge much before or after the price slide — as further indication of fundamental price support. “Don’t get caught up in thinking a short-term problem is necessarily reflective of the bigger picture,” he says.

Although peak prices are in the rearview mirror, the short cattle numbers that spawned increased prices remain. Depending on how many folks got spooked and altered expansion plans, this fundamental force could last longer.

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