HUNTIN' DAYLIGHT -- LOOKING AHEAD IN THE REARVIEW

by: Wes Ishmael

Mirrors make for some of the most imprecise crystal balls. Yet, there's little doubt that the easiest identified reflections from last year will loom large in markets throughout 2016.

Markets

“USDA is forecasting lower prices in 2016 for cattle, hogs, poultry, eggs, and milk,” say analysts with USDA's Economic Research Service (ERS), in the December Livestock, Dairy and Poultry Outlook. “Cattle prices are forecast to decline almost eight percent compared with 2015, due to larger supplies of heavy cattle, high cold-storage stock levels, and sluggish foreign demand.”

At least there was hope that perhaps the near-term market bottom was finally achieved toward the end of the year. Week-to week, Feeder Cattle futures Dec. 24 were an average of $15.92 higher and Live Cattle futures were an average of $10.48 higher. Cash markets followed suit the week of Christmas. Calves and yearlings in scattered auction sales brought $15-$20/cwt. more. Cash fed cattle gained $5-$9 on a live basis at $122-$125. Dressed sales were $16-$17 higher at $200/cwt.

The massive winter storm that began at Christmas will suck some tonnage off the market, too.

Though market moves ahead of Christmas were encouraging, Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, noted in his market comments, “The holiday period is a difficult time to establish a new market trend and it is quite impossible to predict or even interpret market actions during holiday-disrupted trading. Nevertheless, an array of good market news the past few days revives hope for cattle markets.”

As cattle numbers increase cyclically, expectations are for cattle prices to trend lower.

Expansion

It's easy to think expansion plans were altered or at least muted by the late-summer and early-fall market slide, which caught most everybody by surprise in terms of suddenness and degree. Other than trader types who assembled big packages of heifers to breed and sell, it's just as easy to believe prices that were the highest on record except for the previous year were enough to bolster producer decisions to expand.

“Total commercial cow slaughter for January through October 2015 was five percent below 2014 slaughter for the same period,” ERS analysts say. “Dairy cow slaughter through October averaged almost four percent higher year over year and accounted for 57 percent of the total cow slaughter, largely reflecting lower milk prices, which are not expected to improve into 2016. Beef cow slaughter through October 2015 was down 18 percent from same-period 2014, reflecting low but expanding beef cow inventories.”

According to projections from the Livestock Marketing Information Center (LMIC), estimated cash cow-calf returns (basis the Southern Plains) were about $300 per cow in 2015, the second highest in that particular series.

For calculating, LMIC uses an average steer and heifer calf price for the Southern plains for the months of August through November and calendar year average cull animal prices. LMIC analysts point out, “The economic costs not considered in these calculations include: management and labor provided by the operator nor many of his/her capital asset costs involved with animals and equipment.

Preliminary projections for 2016 are about $200 per cow.

Even more than most years, folks will be looking for quantitative confirmation in the January 1 inventory (the Cattle report) set for release by USDA January 29.

Market volatility

None of this suggests the extraordinary volatility gripping markets last year is likely to disappear. There are too many moving parts and it's getting tougher to determine what cattle are worth at any given point in time.

Part of that has to do with the thinness of cash markets. Formula trades account for about 60 percent of fed cattle trade, according to Stephen R. Koontz, agricultural economist at Colorado State University, in Marketing Method Use in Trade of Fed Cattle: Causes and Consequences of Thinning Cash Markets and Potential Solutions. Cash trade represents about 25 percent with the balance forward contracts. Regionally, formula trade is as high as 90 percent in Texas-Oklahoma-New Mexico. As cash transactions decline so does their contribution to price discovery.

Koontz has been conducting a study for the National Cattlemen's Beef Association, examining the issue of price discovery and potential solutions. Given the lower transaction costs of alternative marketing arrangements in fed cattle trade, there is little reason to expect that cash trade will grow.

“Price discovery in the national fed cattle market displays no problems,” says Koontz, in an executive summary for Objective Measures of Price Discovery in Thinning Fed Cattle Markets. “But at the regional market level there appear to be issues developing in the southern plains. Further, price discovery within fed cattle markets has substantially shifted to the futures market.”

Speaking of which, the futures market seems to have become increasingly unhooked from fundamental forces in the past 18 months or so. Part of that has to do with high frequency electronic trading where computers and algorithms trade with one another at lightening speed, overwhelming physical thought and trade.

The Commodities Futures Trading Commission (CFTC) approved proposed rules in November aimed at regulating automated trading in U.S. designated contract markets, which include cattle futures.

“Automated trading can lower transaction costs while increasing trader productivity through greater transaction speed, precision and sophistication. For many markets, automated trading brings trading liquidity, broader market access, enhanced transparency and greater competition,” explained CFTC commissioner J. Christopher Giancarlo. “At the same time, automated trading presents a host of potential new challenges. They include increased risk of sudden spikes in market volatility and ‘phantom' liquidity arising from the sheer speed of execution, potentially flawed algorithms and position crowding. They also include the risk of data misinterpretation by computerized analysis and mathematical models that increasingly replace human thought and deliberation.”

Market Barriers

Congress waited until the final hour, but repealing mandatory Country of Origin Labeling (COOL) within the omnibus-spending bill should mean the U.S. can avoid the steep tariffs awarded to Mexico and Canada by the World Trade Organization to settle their claims against the U.S.

The COOL repeal also does away with the compliance costs incurred by the U.S. cattle and beef industries. After decades of wasted resources, hopefully, finally and mercifully, the repeal also means never again having to chat about it in our lifetimes.

Plenty of other market barriers remain for U.S. beef exports. Plus, the strength of the U.S. dollar continues to squeeze international buyers.

Although U.S. beef exports edged higher in October month to month (the most recent data available), they continued to be lower year over year, according to the U.S. Meat Export Federation. For the first 10 months of 2015, U.S beef exports were 12 percent less than last year in volume and 10 percent less in value. Export value per head of fed slaughter averaged $278.06, down five percent from a year ago.

Weather

The El Niño is expected to remain strong through the Northern Hemisphere winter of 2015-16 and then transition to neutral El Niño conditions during late spring or early summer 2016. That's according to the December update from NOAA's Climate Prediction Center (CPC).

“Seasonal outlooks indicate an increased likelihood of above-median precipitation across the southern tier of the United States, and below-median precipitation over the northern tier of the United States,” CPC analysts say. “Above-average temperatures are favored in the West and northern half of the country with below-average temperatures are favored in the southern Plains and along the Gulf Coast.”

Coming off the best average pasture and forage conditions in two decades, nationally, the forecast suggests some of the hardest-hit drought areas should continue to have the opportunity to re-stock.

Politics

Pick about any subject affecting commercial cattle and beef production and you'll likely find a regulatory battle or one brewing. Toss in the circus that has come to pass for presidential campaigning and you could argue that political risk will continue at its highest in modern history.







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