To say that the cattle markets have been in turmoil is akin to saying the Titanic may have sprung a small leak.
At the writing of this column, fed cattle were trading for $64/cwt., a gut-wrenching scream and a smooth $10/cwt. less than what many market analysts predicted a few months back. Stack that reality on top of breakevens some would have said were optimistic even if the fed market had come closer to expectations, and you're talking lots of economic bleeding.
On top of that, because of it or in front of it, the futures market for cattle—which is supposed to and over time usually has helped level out production and remove some volatility from the market—has seemed to randomly red-line South, making confident hedge opportunities more scarce than members of Alfalfa and Spanky's He-Man Woman Haters Club at a gay pride parade.
Already queasy, the market saw April 2002 Live Cattle futures plummet nearly $10 between March 12 and April 12. March 12 happens to be the day a handful of cattle with lesions turned up at a Kansas sale barn. As a safeguard, the cattle were tested for Foot and Mouth Disease—tests conducted as a matter of routine, tests that came back negative, but tests, rumors of which, wound up hammering the market.
In fact, reaction to the rumors was so sudden and obvious that the National Cattlemen's Beef Association (NCBA) among others asked the Commodity Futures Trading Commission (CFTC) for an investigation to make sure no one was trying to manipulate the market. As of the middle of April, CFTC chairman, Jim Newsome, said, “At this point, we have found no evidence of deliberate manipulation.”
The CFTC report mentions among other things: “Market fundamentals, particularly those released during this period (March 12-April 12), have generally shown increasing cattle placements on feed, higher beef production, large beef cold-storage stocks, record total meat production, lower beef exports, higher beef imports, and much lower prices for pork and chicken. Although no one of these factors by itself shocked the market, all of them tend to depress cattle prices.”
Lost amid the more headline-friendly allegations of market manipulation, the hoohah parade about the need for government intervention in the marketplace and Ronald McDonald testing out imported lean trimmings, are some fundamental dynamics at work.
For one thing, uncertainty about what Congress will finally do with the Farm Bill (still undecided at press time) has added to already negative market psychology. The bill includes, among other things, the ludicrous Johnson amendment, which as submitted would limit packer ownership of cattle more than 14 days before slaughter. Never mind that a Sparks Company study points out such a law could cost the industry as much as $3.5 billion. And that's just for starters. So, until the matter is settled, entities that would be impacted by the legislation—companies that own both packing houses and huge cattle feeding concerns, perhaps even some alliances that also have ownership in packing entities—have reacted accordingly, waiting to see whether or not they can still be in the cattle feeding business. And, everyone else, who will be impacted if those companies are forced to exit the market, or dramatically rearrange business relationships, are hard-pressed to be as aggressive as they might be otherwise.
Next, there was that chicken-hearted ban the Russians placed on U.S. poultry exports. Do you realize about 10 percent of annual U.S. broiler production is exported to Russia? Many of us didn't, but we sure do now. Some 44 million pounds of spare chicken every week have been looking for a new home since the ban was enacted March 10. By April 22, the ban had been lifted but Russia had yet at that time to begin issuing import certificates again.
So, the unexpected preponderance of Colonel Sander's finest started pressuring pork prices, which in turn have pressured beef prices.
Keep in mind, all of this is on top a domestic economy already weakened by recession, domestic uncertainty associated with the war on terrorism and a global recession, including Japan—America's largest beef export customer—where beef exports have fallen off a 25-30 percent compared to last year, based in large part there on fears about BSE.
Perhaps most damaging of all, however, were the predictions of fundamental industry levels and timing that we now see horrifically clear in the rear-view mirror were absolutely wrong. Namely, the shorter cattle numbers anticipated due to cyclical liquidation—cattle seem to keep coming out of the woodwork, making for higher placements than many had expected by now—so far have been trumped in a major way by increased beef production. Plenty of folks, this author included, bet that by this point in the current cycle declining cattle numbers would have to set the stage for market strength. But folks like me absolutely underestimated how much tonnage would still be coming to town at this point. Ultimately, these predictions may come true, but at this stage of the game, it's still a fur piece down the road.
Instead, while January placements were down about three percent compared to last year, February placements were up a staggering 16 percent; placements in March and April were up, too.
Never mind that tonnage has been buoyed additionally by dry weather preventing added, or in some cases, even static heifer retention, and the economic signals indicating if you sell cattle in the beef rather than live you're better off taking risk on the heavy side rather than light, the fact is, lots of us just missed it.
At the beginning of 2002, many analysts were calling for beef production to decline 1-2 percent. As it turns out, production is now expected to increase 1.0-2.0 percent, which could make for the largest annual beef production on record. Add to that increased pork and poultry production, which is also expected to increase this year, and you're talking an increase in total red and white meat production going up one percent making for the most meat produced in the history of this country.
Of course, all of the above has contributed to the worst drain of equity in the cattle feeding industry in history, some $ 1.14 billion since October 1, 2001 and some $2.6 billion over the past five years, according to Cattle-Fax.
Consequently, if you're a betting person, you'd best be wagering on a whole new feeder calf and cattle market, one that has already begun. Depending on which consultant you talk with, betting that feeder cattle will be priced at least $10/cwt. cheaper than last year may be too optimistic.
Economists like Bill Helming, who happened to be exactly right on the current scenario back when everyone else was riding the bandwagon for cattle numbers, say that fundamentals indicate fed cattle are basically trading where they ought to be relative to supply. That means the range between feeders and fed cattle will likely narrow substantially in the foreseeable future, and that narrowing won't come by fed prices moving higher; it will be the prices cattle feeders paying for cattle dropping, probably substantially.
Market manipulation? Doubtful. Outdated risk management tools? Probably. Those dastardly Canadians and Mexicans sending cattle to the U.S., anchoring this country's international trade, which returns far more net dollars to the industry each year than it takes from it? Nope. Big guys taking advantage of little guys? Nope. Those damnable captive supplies helping individuals earn more money and satisfy the consumer more effectively? Nope.
The bottom line to all of this is whether or not we predict the barometric levels correctly, fundamental supply and demand is driving the current market, has driven it in the past, and will continue to drive it in the future, barring short-sighted, careless government intervention, whether we like it or not.