November 7, 2013
Markets don’t like uncertainty; at least that’s the conventional wisdom among traders. That axiom would have us believe then that during the government shutdown of early October, the market would have hunkered down, and trading would have been cautious. However, despite the halt in price information from USDA, both the cash and futures markets moved higher in October.
Cash trade solidly crossed the $130/cwt. mark and established a new record as October closed for business. In fact, fed prices advanced $6-7 during the past month while USDA was away. Meanwhile, spring 2014 fed cattle futures have taken another stab at new all-time highs. So, despite the absence of governmental market reporting, the market has been moving higher – all underpinned by broader fundamentals.
October’s price achievements are well in line with expectations based on the past several years. Last month’s column explained, “…the upper end of the market will likely range between $130 and $135 in November/December.” That estimation was based on historical seasonal patterns and the prospect of wholesale prices moving back through the $200 level in the fourth quarter. We’ve at least managed to get there, albeit a little earlier than normally expected.
Also noted last month, though, was that a $5 spread is a large window for the purpose of estimating the peak for fall prices. In general, given the bullishness within the market in recent weeks, there’s likely some upside left over the short-run.
Beef customers beginning to make purchases for the holiday season in earnest should also bolster the market. Plus, supply remains relatively tight. So, consider October’s cash market advance coupled with likelihood of active beef movement in the near-term, and all the while fed cattle supply remains limited. Those factors all combine for a favorable outlook ahead of Thanksgiving.
That said, there’s also always the need for vigilance and assessment of all the factors that can get in the way. Primarily, there’s only so much room for pricing power in the meat case and on restaurant menus; clearly, a $200+ Choice cutout makes retail and restaurant margins particularly challenging. That portends some pushback if the market moves too far, too fast. All that has been reflected by CME action in recent days; trading seems hesitant at these levels and appears poised to consolidate before making a push higher.
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Moreover, the economy continues to just sputter along with no real prospect for meaningful job creation in the near future. Not to mention the continued public angst caused by commotion around the federal budgets, debt ceiling and Affordable Care Act. This will be an especially interesting holiday season to watch in terms of consumer spending and the influence that has on the potential for higher prices in the protein market over the long-run.
October’s Cattle on Feed report was released nearly two weeks later than normal because of the government shutdown. General consensus of the report was that it was largely in line with pre-report expectations. However, perhaps the most surprising aspect of the report came on the marketings side. Fed cattle trade came in at nearly 1.7 million head – a whopping 6% ahead of last year’s pace, and only 4% behind the five-year average. That work proves very supportive of the outlook of tight supply in the deferred months. Cattle feeders will likely be managing their respective supply and marketing plans around the way in which December and spring futures begin to shape up following the report.
That’s further supported by the slow placement rate in the feedlot sector. September placements were just slightly over 2.0 million head – that’s about equal with last year’s mark. However, one month doesn’t equate to supply; more importantly, the three-month (July-September) total barely exceeds 5.5 million head and well off the pace of previous years (Figure 1). That will continue to help boost prices – in both the fed and feeder markets – during the remainder of 2013 and into 2014.
Perhaps most interesting in all of this is that tighter supply in the feeding sector is NOT occurring because cow-calf producers are retaining heifers. October’s Cattle on Feed report also includes the quarterly assessment of inventory by class. Heifer inventory in feedyards remains consistent with previous years. At least early in the fall run, all indicators are that heifer retention is not underway (see this week’s Industry At A Glance).
This is an exciting time in the beef industry. It’s hard to imagine that in December 2009, the fed market traded under $80. Who would have ever thought we’d have a run exceeding $50 in less than four years’ time? Stated another way, that’s equivalent to the market gaining over $1/cwt. each month since that time. Clearly, though, higher prices don’t always mean better profits.
That’s probably best represented by Figure 2. Historically speaking, higher fed markets tend to attract cattle into the feedyard, and serve to build inventory over time. However, in recent years, feedyard inventory has declined despite the steady, persistent grind higher. That speaks to challenges around profitability and procuring feeder cattle. Meanwhile, the market trends also speak to several other factors from a broader business perspective.
• First, this industry has done a tremendous job of shoring up beef demand. In the midst of very difficult economic times, consumers have proven willing to pay higher prices for beef. But higher prices equal higher expectations – an emphasis upon quality and consistency remains essential.
• Second, it’s also made owning cattle a very high-stakes game. The capital-at-risk with each and every truckload continues to mount. This is not a business for the faint of heart – especially when considering the potential volatility that can occur on a weekly or monthly basis within commodity markets.
As always, stay fully informed, and maintain objectivity around all aspects of the business!
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