U.S. cattle feeders might be excused for believing there is a curse on the September market. Feeders endured a historic collapse in live cattle prices in September last year, when cash prices fell more than US$27 per cwt in five weeks. Now prices have suffered another collapse, starting in mid-August, which showed no sign of ending by early September.
Mindful of last year’s collapse, cattle feeders this spring and summer were determined to avoid a repeat. They did everything right, notably by aggressively marketing cattle from May on. August steer and heifer slaughter was likely 16 per cent larger than in August last year. Given this, cash live cattle prices were likely to fall as the month progressed. But no one expected them to slide as much as they did, to $104-105 per cwt by the week ended September 9.
The slump left people struggling to understand why prices had fallen to their lowest level in five years. As noted, steer and heifer slaughter was large in August. But it went against a very low slaughter total last year, the main reason for the market collapse in September. August’s aggressive marketings by themselves should not have caused such a decline in prices.
August retail beef sales were slightly softer than expected because of extreme heat in parts of the country. But beef demand held up enough not to be the reason why cattle prices fell. USDA’s All Fresh retail beef price in July averaged US$5.75 per pound, down 6.5 per cent from last year, and prices for August were expected to decline as well. August’s average retail feature price was $4.97 per pound, the first time it had dropped below $5 since March 2014.
The main explanation appeared to be that that the futures market continued to be irrationally negative to live cattle. The catch-22 remained that cattle feeders had no choice but to sell cattle even if cash offers were lower, as long as the basis between cash and futures prices remained positive. It was still positive the second week of September, and that’s why cattle feeders sold cattle at prices $5 lower than the week before. This was after the October live cattle contract had lost 475 points the week before and another 157 points the day after the Labour Day holiday to close at $100.02 per cwt. It was inconceivable a month earlier that the contract could fall that low.
It is easy to blame the futures market for dragging down cash prices. After all, it has been negative to the live cattle cash market for much of the year. But why it got even more negative in August and early September is a mystery. It’s worth noting that the October contract on August 9 closed at $115 per cwt. Nothing in the fundamentals appears to justify its $15 decline after that.
Total U.S. cattle slaughter for the year to September 3 was up 832,000 head or 4.3 per cent on the same period last year. Beef production was up 4.7 per cent on last year. Hog slaughter was up 362,000 head or 0.5 per cent on last year, while pork production was 0.1 per cent below prior year levels. Chicken production was up 2.4 per cent on last year.
USDA forecasts that U.S. red meat and poultry production for 2016 will total 97.610 billion pounds, up 3.1 per cent on 2015. Maybe the futures market is so negative because of this. That’s not a huge year-on-year increase. But perhaps supply and demand are so delicately balanced that any increase in meat and poultry supplies tips the scales disproportionately against livestock prices.