Futures markets perform an important role in agricultural markets by allowing producers of key commodities to construct risk management strategies to help them make money. The futures are also anticipatory markets, and these two roles sometimes make for strange bedfellows.
Right now in the U.S., the futures market for feeder and live cattle are crushing the spirit of cattle producers, especially cattle feeders with unhedged cattle. The crushing began Easter Monday and has continued unabated since then. As I write this on May 13, the June live cattle contract has just closed down 270 points at US$109.75 per cwt. That represents US$12.86 per cwt wiped off the value of the contract.
No supply or demand calamity caused the futures to collapse like this. Instead, the collapse came as pension funds, also known as managed money, started exiting their long positions in live cattle futures contracts. There has been something of a herd mentality to their exit. One large fund started to liquidate and the others followed. Some market analysts have dubbed this the “Revenge of the Funny Money.”
The futures’ collapse has inevitably spilled over into the cash live cattle market. Prices in the first quarter and in the first three weeks of April held up much better than expected, in part because extremely poor feeding conditions up north slowed feedlot marketings. USDA’s five-area average price for the week ended April 21 was US$128.42 per cwt live, the second-highest weekly average of the year.
However, the average the second week of May had slumped to US$120.34 per cwt live. That’s because the plunging futures market caused hedged cattle feeders to sell cattle early in the week at lower prices for three weeks in a row. These cattle feeders were simply taking advantage of an US$11 plus basis between cash and futures prices. That might seem wide, but the five-year average for the basis between early May cash prices and the June contract is US$12. Prices are likely to keep going lower as long as the large basis remains. It is challenging at this point to know what factors will come into play to stabilize cash prices.
A key factor will be demand this grilling season, which is now in full swing. So far this year, demand for U.S. beef at home and abroad has been remarkably strong. The steady performance of the U.S. economy, from solid GDP growth to job creation, rising wages and low unemployment rates, has put more money in consumers’ wallets than they’ve had for at least a decade.
The result is that beef remains king of the grocery store meat case. The classic definition of improved demand — larger volumes sold at higher prices than a year ago — is playing out almost every week. USDA’s All Fresh retail beef price in March averaged US$5.78 per pound, up 3.0 per cent from March last year. The Choice beef price averaged US$6.07 per pound, up 3.4 per cent. That’s especially significant, as Choice accounts for 70 per cent or more of all the beef that is quality-graded.
U.S. beef exports are down slightly on last year in part due to tariff pressures in Japan. For the first quarter, exports were slightly below last year’s record pace. U.S. beef cuts are still subject to a 38.5 per cent tariff in Japan while competitors’ rate is nearly one-third lower at 26.6 per cent, notes Dan Halstrom, president and CEO of the U.S. Meat Export Federation. This really underscores the urgency of the U.S.-Japan trade negotiations, which must progress quickly if the U.S. is going to continue to have success in the leading value market for U.S. beef and pork, he adds.