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March 10, 2016
The old adage, “no news is good news,” seems a fitting description for the market during the past several months. After all, steady markets are a welcome reprieve from the pounding that occurred during the second half of 2015. February’s fed market managed to maintain its sideways chop of late. Fed cattle have been locked in a trading range with an extended run of $132 to $136 during the first two months of the year (Figure 1).
February’s consistent fed cattle trade goes hand-in-hand with the wholesale side of the business. Choice carcasses have also been stuck in relatively steady trade. Daily beef pricing has indexed the cutout between $214 and $220 for much of February. And while there have been some concern about the weather’s influence on the market as a whole, that has been largely contained within the northern feeding tier and hasn’t really had a large influence on the broader market, with the exception of some expanded regional basis in recent weeks.
While the cash market has been comparatively tranquil in recent months, trading action at the Chicago Mercantile managed to heat up during the second half of February. Futures traders staged a solid rally, catching futures prices up with the cash market and then some. The February contract added $9 to close out at $139.50. Meanwhile, the April Live Cattle contract ran up from $128.50 mid-month to surpass the $138 mark as the month closed for business.
But as March opened for business, the futures market ran out of gas. As such, hopes for a rally to, and ultimately past, $140 simply wasn’t in the cards. Seemingly, to overcome $140 resistance, the market will require some fresh, positive news and renewed cues from a stronger cash market. And given seasonal dynamics, coupled with things to occur in the coming month, such a rally may hold off until the market clears itself with current positioning and there’s more clarity around interest rates.
With that thought in mind, beef and cattle markets will likely churn with more of the same during the next several weeks leading up to the Easter season. The market will then turn its attention to spring with warmer weather and grilling season coming at us in earnest.
To that end, several key fundamental drivers around demand will remain important to watch. Most critical will be boxed beef values and overall slaughter volume. Those indicators will provide a good sense of beef’s general demand structure and potential for the cash market to establish a spring rally.
A potential boost to the cash market higher will be predominately derived from the U.S. consumer. However, the state of the consumer is an especially difficult call right now. Mixed indicators continue to dominate the economic outlook. That reality was best demonstrated by the most recent jobs report: 242,000 new jobs were added in February – well ahead of analyst expectations. Conversely, the other side of that report indicated wages actually declined in February.
And that leaves us, then, with the never-ending wait and see from the Federal Reserve in March. Both the interest rate decision and general commentary from the Federal Open Market Committee will further drive the direction of the U.S. dollar in coming months. That possesses huge implications for both beef and grain producers on a number of fronts.
Meanwhile, from a production standpoint, the corn market will also have to endure some key reports in March. The market will absorb USDA’s monthly WASDE report, released March 9. Additionally, the Prospective Plantings report will be released on March 31. Nevertheless, absent any disruptive news, speculators seem content to be on the short end of the price forecast going forward (Figure 2).
So, all in all, looking down the road, March may shape up to be an influential month from a number of perspectives. That’s not new. As noted last month, “…. 2016 is shaping up to be a very different year compared to 2014 or 2015.”
And now we’re in the heart of it all. The primary difference comes from the supply perspective with bigger numbers ultimately heading to the market. Plus, there’s additional economic and political uncertainty—especially around the dollar, interest rates, and strength of the global economy—swirling around all financial markets.
Across the various sectors, cow-calf producers will likely experience the largest difference this year across the various sectors. For example, LMIC estimates that returns will remain favorable at somewhere around $200 per cow.
However, whatever the number or estimate, the important thing is the trend: current estimates are $100 and $300 per cow lower versus 2015 and 2014, respectively. That reality draws attention to the importance of managing costs and marketing ever more carefully in the year(s) to come.
To that end, also noted last month, “There are renewed challenges for producers looking to market cattle—the market will prove far less forgiving and rewarding price targets may prove more elusive.”
So, despite some quiet days of late, the market continues to throw its challenges at producers. Producers need to be prepared for potentially large moves, especially to the downside. Markets can be ruthless and there are a whole lot of drivers swirling around.
Producers should be, now more than ever, investing time and effort to monitor markets carefully and objectively to ensure successful decision-making. That said, it’s also important to remember that change and challenges also mean new opportunities—the innovators will be rewarded appropriately.
Nevil Speer is based in Bowling Green, Ky., and serves as vice president of U.S. operations for AgriClear, Inc. – a wholly-owned subsidiary of TMX Group Limited. The views and opinions of the author expressed herein do not necessarily state or reflect those of the TMX Group Limited and Natural Gas Exchange Inc.
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Nevil Speer serves as an industry consultant and is based in Bowling Green, KY.
Nevil Speer has extensive experience and involvement with the livestock and food industry including various service and consultation projects spanning such issues as market competition, business and economic implications of agroterrorism, animal identification, assessment of price risk and market volatility on the producer segment, and usage of antibiotics in animal agriculture.
Dr. Speer writes about many aspects regarding agriculture and the food industry with regular contribution to BEEF and Feedstuffs. He’s also written several influential industry white papers dealing with issues such as changing business dynamics in the beef complex, producer decision-making, and country-of-origin labeling.
He serves as a member of the Board of Directors for the National Institute for Animal Agriculture.
Dr. Speer holds both a PhD in Animal Science and a Master’s degree in Business Administration.
Contact him at [email protected].
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