January 29, 2015
The market crash of 2015 has been the dominant conversation of the year so far. A rally in CME cattle futures had the bulls resurfacing and the bears unimpressed. Everyone is searching for clarity, but mostly they just want an explanation. The explanations thus far are almost comical; unless, of course, you’ve been selling cattle the last 60 days.
1. Falling or uncertain demand is one explanation that keeps being put forth. Folks promoting this rationale point to the precipitous decline in boxed-beef prices. However, they totally ignore that boxed-beef prices set an all-time, record-high just several weeks ago. In fact, boxed-beef prices have followed future prices more than the inverse.
2. Oil prices are also being cited as an explanation – depending on whether you’re a bull or a bear. The bulls say declining oil prices saves the typical family $100/month at the pump, and much more in declining prices relative to lower shipping costs. Some folks estimate lower prices at the pump constitute a $100-billion stimulus to Americans – with no expense to taxpayers, by the way.
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Meanwhile, the bears argue that lower oil prices are more reflective of the declining global economy. They say that lower oil prices are a symptom of a weakening global economy, which will eventually shut down the tepid growth that the American economy has been experiencing. But can anyone really believe that beef demand has shifted in just four weeks, or that the beef economy is responding to falling oil prices to such a degree?
3. Then there’s the cattle numbers game? Cattle-on-feed (COF) numbers were up 1% in the latest report. Meanwhile, rapid expansion of the cow herd must be occurring, as heifer numbers are down 2%.
But the fact is that the COF number has shifted only in a very minor way; meanwhile, the basic supply-and-demand construct remains intact.
Of course, expansion would decrease numbers in the short term. And cattle prices and forage conditions – with my apologies to those in the Southwest who are getting drier as predictions for more moisture and El Niño conditions continue – point to expansion. So, expansion is undoubtedly occurring, but the numbers defy those who are claiming that expansion is occurring at a surprising pace.
Trying to explain this market is like analyzing the loss of a favorite football team. Everyone is a pretty good Monday morning quarterback, and we find lots of reasons to justify why we should have – or could have – won. The tendency is to get too complicated in our analysis. Sometimes the other team was simply better; they executed better or the ball bounced their way.
4. The current market situation demands an explanation, but the toughest one to swallow might be the most accurate. That’s that the market exceeded virtually everyone’s expectations the last 18 months, and funds and speculators joined in on the hoopla. But record levels also make people nervous, and when the futures headed south, it was a mad race to the exits.
In the short term, the market is always dictated by fear and greed, and fear has ruled. The beautiful thing about fear is that it has a way of negating itself over time. The latest rally didn’t change the dynamics of the marketplace any more than the crash of 2015 did. However, it has probably done a lot for the market to search for some equilibrium. The good news is that both the bears and the bulls are a little unsure of themselves.
Buyers have been incentivized to try and buy cattle lower, and they will. Sellers were willing participants, but then greed has a way of returning as well. I don’t have a good explanation for the crash of 2015, but that lack of explanation has more credibility than some of the explanations being offered.
The opinions of Troy Marshall are not necessarily those of beefmagazine.com and the Penton Agriculture Group.
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