October 29, 2015
Market participants don’t typically talk about volatility when it’s working in their favor. But when the market makes sharp moves in an unfavorable direction, volatility becomes a primary topic of conversation. That’s certainly been the case-of-late out in the country, given the market’s recent plunge.
Therefore, it’s helpful to consider some broader perspective around the significance of the recent market action. This week’s graph represents the 13-week moving average around week-to-week price changes, in absolute terms. In other words, the direction of the change doesn’t matter; rather the focus is upon the weekly market difference.
That’s an important analysis as it relates to risk management strategies over time. Most importantly, the history may help explain behavior amidst the recent price tumult and address why some cattle feeders found themselves exposed during this recent downturn.
Fed market volatility bottomed out in September 2013 – the 13-week moving average was hovering around $8 per head just two years ago. Then, during 2014, weekly price changes amped up – albeit mostly in a positive direction as the marketing was transitioning from $135 per cwt trade to $170 per cwt over the course of the year.
Now fast forward to 2015. That steady increase in volatility continued, but now the market was moving in the opposite direction! Volatility has certainly amplified in 2015; in fact, cattle feeders have recently endured changes in fed steer/heifer value exceeding $100 per head from one week to the next. The 13-week moving average currently exceeds $60 per head.
Risk management has proven challenging during the past several years. First, 2013 and 2014 lulled many market participants, analysts and observers into complacency around market volatility. Moreover, through multiple turns of cattle, option strategies proved to be an unnecessary cost. Meanwhile, for sellers, favorable hedging strategies were difficult to come by at time of placement, and carried high opportunity cost as the cash market surged to new highs. All the while, there has been a sharp decline in the volume of short positions on the board by hedge funds and other commercial market participants the past several years.
What’s your view of the recent volatility? Do you perceive the volatility of late as a one-off event or something the market will have to continue to grapple with? Does it make you rethink your plans going forward to manage around heightened volatility?
Leave your thoughts in the comments section below.
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