Most markets crave stability and predictability. But this year’s live cattle and beef markets in the U.S. have been anything but that. In fact, both have seen more volatility than for years. Much of the volatility has come in the past few months, with cattle futures prices offering a wilder ride than the most extreme roller-coaster.
Live cattle futures spent the first half of the year playing second fiddle to a solid cash market, which put in its weekly high the first full week of the year (US$169.67 per cwt). The futures after that played catch-up as each nearby contract moved towards expiration. Cash prices appeared to put in their annual low the third week of July, as they rallied modestly after that. But they then fell every week for eight weeks to put in a new low of US$117.71 the week ended October 4.
This was a startling 30 per cent decline from the high, and as I noted in my second October column, was largely because cattle were fed to record heavy weights. Carcass weights peaked for the year in mid- to late October, two or three weeks earlier than normal. But the peak produced some mind-boggling numbers. Steers hit a record 930 pounds while heifers hit a record 849 pounds. Such weights would have been unthinkable 10 years ago.
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Meanwhile, boxed beef prices rallied before each of the three main holidays (Memorial Day on May 25, Independence Day on July 4 and Labour Day on September 7) but had a mini-collapse after each holiday. This made it extremely difficult for retailers to plan their beef features for the summer-fall period. More recently, boxed beef prices followed cash live cattle prices and plunged in September and early October before stabilizing.
Nothing though prepared market participants for the futures’ volatility in the first two weeks of November. The December live cattle contract lost US$11 per cwt in nine days, despite gaining 482 points in two days the second week. This dragged cash cattle and boxed beef prices down as well.
Such volatility has many in the industry worried about the futures’ role as a dependable risk management tool. Cow-calf producers, cattle feeders and packers use the feeder and live cattle contracts to know where to price cattle, to lay off risk and to get financing for livestock purchases. But the extreme action by the futures has undermined this ability, especially as no one foresaw the meltdown in live cattle futures that began November 3.
The futures’ volatility has occurred for both technical and fundamental reasons, say analysts. Outside funds dominate the computer-based trading that occurs each day. They have had a huge influence over the market for the past 18 months. Some traders point to the loss of open outcry pit trading as a factor as to why the futures often appear divorced from the fundamentals. Technical trading automatically triggers more selling when futures prices fall below key support levels, which happened in early November. But at the same time, supplies of heavy, market-ready cattle were not cleaned up as quickly as some thought they would be. Feedlots in turn did not sell enough cattle in October, so they came into November still less than current in their marketings. Meanwhile, beef sales at both the retail and restaurant levels remained soft in early November in the face of much cheaper pork and chicken. It’s unclear though how much attention outside funds were paying to the fundamentals. To this observer, computer algorithms appeared to be trumping supply-and-demand data.
That’s what many market participants are so worried about.