Expect cattle market volatility to continue

Prime Cuts with Steve Kay, from the February 2016 issue of Canadian Cattlemen

The North American meat and livestock industry got a welcome pre-Christmas present when Congress repealed the beef and pork parts of the country-of-origin labelling law. The move brought relief and a certain rejoicing in all three countries. Not only can normal movement of livestock resume without costly segregation, potentially disruptive retaliatory tariffs were avoided.

The industry though, especially the U.S. beef industry, will be craving a reduction of something that was actually disruptive and likely cost the industry hundreds of millions of dollars. That something was the extreme volatility seen in the futures, cash live cattle and wholesale beef markets. However, the volatility will continue, especially while the U.S. continues to have a full-blown “weather market.” It alone will cause live cattle prices to remain in flux every week until March.

The extreme volatility began with the futures market, which at times appeared to be divorced from market fundamentals. But it didn’t directly cause the volatility that pervaded the cattle and beef markets. A disturbing pattern was how boxed beef prices had huge run-ups then equally large collapses. This occurred before and after each of the three biggest holiday weeks of the summer. It occurred again in November-December when prices collapsed (the Choice cut-out lost nearly US$24 per cwt in seven weeks) then exploded the last week of the year.

The collapse also forced cash live cattle prices sharply lower. They lost just shy of US$20 per cwt in seven weeks. But they also then exploded, in large part because of severe winter weather in most of cattle-feeding country. The result was an unprecedented US$18 per cwt rally in live cattle prices in two weeks.

Last year taught the beef industry some further painful lessons. Cattle feeders discovered that the money always runs out before the cattle. Cattle feeders and packers realized that the shrinking cash grain-fed cattle market demands urgent action or it will disappear. Cow-calf producers accepted the reality that the remarkable returns enjoyed the past two years are now history. The biggest lesson though was the damage that record-high wholesale and retail beef prices caused. Those prices made beef deeply uncompetitive with pork and chicken and even priced ground beef out of the reach of some consumers.

A new year though brings fresh hopes. Cattle feeders will be desperate to stem their historic losses of 2015. As noted, cash live cattle prices rebounded over the holidays but only because of the weather. Higher prices will be necessary for at least the next two months just to offset the weight loss and much higher cost of gain caused by wretched feedlot conditions. It might take cattle feeders several years to recoup their 2015 losses.

Cow-calf operators saw lower returns in 2015 compared to 2014, and the pattern will be repeated this year. But returns might still be US$200 per cow. It’s worth remembering that returns often struggled in the US$50-$100 range and that was while many producers also battled severe to extreme drought. Drought conditions have largely disappeared except in California so this year should be a good one.

The biggest hope will be that beef becomes more affordable. A projected 4.3 per cent increase in U.S. production from 2015 will be a start. But how much more aggressively retailers feature beef will be the key. Already the signs are promising. Ground beef at US$1.99 per pound appeared to be history. But the Lucky supermarket chain in northern California put that price on 85 per cent lean ground beef over the holidays. I ran to the store to stock up, and I hope others did as well.

About the author

Contributor

A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

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