Astounding, unprecedented, monumental – or you can tack on any of your other favorite descriptors to explain the market’s action during the past month. Whatever label you assign, June’s market is one that should stick in our memory for a long time to come (regardless of what happens from here). And while moves to the upside are generally welcome, the surge underscores just how volatile the beef complex can be – calling attention to the importance of risk management (more later).
As review, the market closed business in May with a steady trade of mostly $144-6 throughout the month. That was significant, especially in the latter half of the month. Memorial Day buying was over and a sharp discount lingered at the CME.
That was consistent, though, with the underlying persistent tone that pervaded the market throughout April and May. As I noted in April, and repeated in May: “…if April is any indication of the broader undertone, [weaker summer trade is] not going to happen without a fight.” The market not only fought but turned all expectations upside down, catching everyone off guard (I don’t think anyone would have guessed a $155/cwt. fed market in late-June).
Just when the market seemed poised to break into summer lows, it reversed direction. June’s surge is historic, as the market established new record highs (Figure 1). Plus, it’s contra-seasonal – this sort of thing just doesn’t happen in the summer. Meanwhile, the need for convergence managed to pull CME’s June Live Cattle contract $15 higher over the course of the month.
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The ultimate underpinning for the market always goes back to what occurs on the beef side. Beef’s pricing power continues to push higher with seemingly little resistance. Wholesale values took out new highs in June: the Choice cutout closed out both a new daily record ($247) and a new weekly average record ($244) as the month closed for business. Despite higher retail prices, the middle meats have staged an important recovery over the course of the year and have largely served to bolster cutout values in recent months (Figure 2).
The biggest story of all, though, has to be on the feeder cattle side. The CME Feeder Cattle Index bottomed out in late-May last year at $132. In just 13 months, the market has surged $80/cwt – the equivalent of adding $600/head.
With that in mind, a load of feeder cattle is now worth over $100,000 (see this week’s Industry-At-A-Glance for some further perspective). Consider that a 25,000-head feedyard running near full capacity needs to purchase about 1,000 head/week; at current market values, that equates to investing over $1.5 million just for feeder cattle on a weekly basis. All that speaks to the ever-increasing capital required to operate and the general level of mounting financial risk that surrounds the beef complex.
With that in mind, it could probably be said that market developments of the past months are a good-news, bad-news story. The good news is that the markets have advanced during the past month, which means more revenue for those who remained unhedged. The bad news is that the markets have advanced during the past month, which means lots of money left on the table for those who hedged their summer sales.
That perspective inherently invokes the double-edged concept of risk. Generally, risk is perceived as hazard or potential danger and thus appeals to the need for some type of protection. However, the Chinese symbol for risk also includes the concept of opportunity – or more specifically, missed opportunities.
That’s a hard line to walk – and even more difficult when faced with volatile markets. Risk tolerance (danger and opportunity) is different for every operation. That brings us around to differing perspectives. Carl Richards, who details investment emotions in his best seller “The Behavior Gap,” explains it as follows:
The fear perspective is one in which the, “…the pain of loss [down markets] outweighs the pleasure you get from gain [up markets]. In that case, you can manage your [business] to reduce the pain to a level that you can manage even during truly bad market downturns. You may miss out on some gains when the market rises – but you’ll know that your risk is reasonable.”
Meanwhile, the greed perspective places you on the other side of the coin. Richards writes: “What if you just can’t stand sitting on the investment sidelines and hitting singles and doubles while your brother-in-law brags about hitting home runs? Then you need to tilt your [business] toward [strategies] that will get you your share of gains… But you’ll suffer the brunt of the next downturn.”
Balancing all of that looks different for each and every operation depending on any number of variables. But as mentioned last month, the capital-at-risk at these levels, not to mention the volatility, simply can’t be ignored. And so with that, it’s always good to remember the importance of investing in good, reliable information coupled with disciplined and objective decision-making. In combination, they all help to ensure successful decision making going forward.
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