Facts, Fear and a Remedy

By Cassie Fish, CassandraFish.com

BOW Ad 05-2015The more irrational the futures market behavior becomes- futures collapsed limit-down quickly moments after the opening and the pool of unfilled sell orders is growing by the minute- the harder we look for a fundamental explanation. Of course, it’s easy to say futures broke today because cash broke last Friday more than expected- as much as $5. But then one could also argue that the packer is afraid to kill many because the boxes are sluggish and the boxes are sluggish because the futures acted lousy and- well you get the picture, on and on the circle goes.

Plummeting futures are the expression of the fear felt across the country that the futures market bottom thought to be in last week won’t hold and the spot low made in early October may be revisited. At the same time there is fear of getting short at this level and being caught short in the hole. No one can agree or even seems to know what needs to occur to stabilize the market and that, in itself, is frightening.

When does the negativity become a bit of a self-fulfilling prophecy? Most analysts and traders do try to peel back the layers of bearish rhetoric with the intention of quantifying, after a year-long break, where equilibrium might be found. Isn’t a 30% break enough?

When looking for a comparison to 2015, at least as a percentage, all roads lead to the mad cow break in 2003-2004 and at this juncture, this year’s break in futures and cash prices is as bad as the mad cow break but the cutout break isn’t as severe by about 8% meaning the packers are faring much better this time than last. Of course the packing industry sacrificed since then by shuttering plants.

Finding another year when it was “as bad” doesn’t go far though in illuminating what’s to come. These are complicated times with complicated issues (like the HFT impact on futures trading and the impact of growing captive supplies on price discovery for fed cattle). Both of these speak to a large-scale, long-term transition in the way business is conducted in a mature marketplace. The impacts of either or both on the 2015 bear cattle market are not fully understood nor likely will be until after the fact. But they sure are muddying up the waters as to what’s causing the continuation of such a historic decline.

We are overly familiar with the other fundamental limitations this market has and is facing. Largest pork production in history last week- check. Lousy exports of U.S. ags thanks to a screaming-high U.S. dollar- check. Average retail chicken prices last week $1.66 a pound (according to the Wall Street Journal)- check. Also of course the mountains of imported lean beef that ended up swamping the U.S. grinding beef complex which is still under pressure. 2015 YTD beef production is up only 1.1% from last year’s cyclical low, but it feels like way more.

         Can Anything Be Done About the Immediate Problem?

Putting all the above analysis and rhetoric aside, the industry has created a log jam as it were. Retail beef prices are still sky-high, down very little from this year’s all-time high so consumer beef demand is still muted. It’s unclear what it will take to entice retailers to begin to pass on the cheaper beef prices to consumers rather than banking the margin, content to sell less for more.

2015-11-16_chart1

This makes the packer’s job of getting more money for beef difficult, and rather than lose money, the packers keeps the kill curtailed which is the primary reason the cash cattle market has been in a down trend for a year. If the U.S. beef packing industry killed 40 hours per week at all plants, the fed kill would be about 475,000 head rather than the 440-460k head kill seen the past months. The last time the industry killed 40s was week ended September 13, 2014.

Copyright © 2015 The Beef Read. All rights reserved.
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Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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