February 25, 2016
I’ve always been skeptical of the conspiracy theorists relative to the marketplace. In the short term, market psychology can take the market higher or lower than the fundamentals would indicate. Yet, there seems to be those who always come out when the market takes a downturn; distorting the data and pointing fingers because retail prices haven’t declined as much as wholesale beef prices.
That, of course, is always true, but the inverse was also true when the market went dramatically higher. Retail prices tend to be far less volatile and move much more slowly than wholesale beef prices. The reasons for this are obvious, well understood, and this has been the case for decades.
These same demagogues resurrect packer collusion arguments when the markets move lower and yet the pricing models and statistical analysis never confirm their position. These individuals weren’t claiming a conspiracy when prices went higher than anyone anticipated in the fourth quarter of 2014, but their voices become shrill when the market moves lower than anyone anticipated, like the fourth quarter of 2015. Yet the resurrection of the same old arguments that we see every time the market moves lower are as predictable as they are wrong.
With that said, we have seen some things in the last 15-18 months that are new and perhaps legitimate concerns. Some of it boils down to rethinking how we look at the data. Actual head counts or numbers mean very little; the market does not respond to head counts, it responds to pounds or tonnage.
As we all know from a cow-calf perspective, it isn’t the number of cows that is the important number, it is pounds produced per acre. From the packer side, they don’t look at spreading their fixed costs over X number of head, rather it is over pounds. The same can be said for every segment of our business.
Even measures like currentness, which is still important, has to be rethought. Under the classic definition, the industry was uncurrent late summer through the fall. In actuality, market fundamentals had shifted the ideal marketing endpoint, and producers were making good decisions based upon marketing signals. The marketing window changed.
In addition, we have seen an unprecedented increase in volatility in the futures market. The old saying is that volatility equals opportunity, but for many producers it has made it difficult to use the futures market as a risk management tool, causing cattle producers to argue it is broken as a price discovery option. Whether it be computers, high-frequency traders or some other factor driving this change in behavior, it is real and significant. Finding a solution to the problem, though, has not been easy. We need and want speculators as we need the liquidity and market depth they provide, but we don’t want their market-distorting tendencies.
Many would argue that increased risk and increased volatility is simply the new norm. If it is, the new norm will certainly be more challenging. Hopefully, we focus on the “real” market issues instead of the rhetoric that gets trotted out in every market turn that is more about stirring up membership than helping the industry.
The opinions of Troy Marshall are not necessarily those of beefmagazine.com and the Penton Agriculture Group.
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