In my 42 years as a journalist, I’ve witnessed natural disasters and the burning of thousands of animal carcasses after FMD outbreaks in the U.K. All were traumatic to watch. Market collapses don’t equate with them but the massive market meltdown in the U.S. in August and September has been a brutal experience for the industry.
Prices have collapsed as much as they did after the U.S.’s first BSE case in December 2003. Cash live cattle prices (basis a five-area steer) fell $22.52 per cwt from the first week of August to September 25. The Choice boxed beef cut-out fell $32 per cwt from August 26 to Sept 25. Cattle prices are lower than they were at the end of 2013. The Choice is at its lowest daily level since February last year.
The collapse was all the more shocking because it contradicted forecasts. Even the most negative forecast put a live cattle low above $140. Yet prices averaged only $128.61 live or $202.44 dressed the week ended September 25. Cut-out values had been expected to decline sharply. But most forecasts were for the Choice to hold at $230. Now there’s speculation whether cattle prices will hold at $125 and whether the Choice cut-out will hold at $205-$207.
The collapse was especially confounding because September cattle prices are normally higher than those in August. August prices averaged $148.45 per cwt (based on a simple four-week average). But they averaged only $136.12 the first four weeks of September. Yet the meltdown might not be over. Cattle prices sank because of record heavy steer and extremely heavy heifer carcasses, and because of weak beef demand. Cattle feeders only began to start getting rid of their heaviest cattle at the end of August and analysts say a full cleanup might not be completed until late October.
Steers the week ended September 12 averaged a new record of 919 pounds and heifers averaged 826 pounds, four pounds off their record. Steer weights might set new records every week into mid-November and there’s talk of them topping at 935 pounds. This is at the crux of the price collapse. Carcasses are not only bigger, they are carrying far more back fat than a year ago. A significant number are being graded as Yield Grade 4s or 5s and are receiving significant price discounts. Some packers say they cannot handle the largest cattle because they drag on the slaughter floor.
Cattle feeders are paying a heavy price for two actions. They bought feeder cattle replacements last fall at record-high prices because they felt feeder cattle supplies would get much tighter. They felt they had better buy cattle at any price rather than have empty pens. This came back to haunt them in February as losses exceeded $200 per head.
Then they began to feed cattle longer and longer, to avoid having to replace them, to keep their pens full and because it was economical to do so. Some analysts by July warned this could create a backlog. But as cash live cattle prices rallied to $151 per cwt at the start of August, most cattle feeders shrugged off the warning and kept holding cattle back.
A year ago, cattle feeders were enjoying excellent margins and amassing their largest equity positions for some years. They’ve now exhausted that equity, after losing as much as $350 per head in September, the largest-ever loss for the month. The margin deterioration has reinforced two old adages, that the money always runs out before the cattle, and that the first loss is the least loss.