Sort & Cull

The cattle complex has been under pressure this week, leading to aggressive losses in futures. Over the past week, the April futures contract has fallen $11.45 per cwt as traders reacted to the spread of coronavirus across the globe. The potential impact of the virus on global economies is affecting nearly all market sectors.

It was only six months ago when the market was under similar intense pressure following the fire at the Tyson Beef plant in Holcomb, Kansas. For three days surrounding the fire, spot-month contracts fell $8.13 per cwt until buyers returned.

The causes of the market pressure in these two situations are completely different: The current case is based on fears of a global epidemic affecting demand, while the fire-related panic was based on concerns about processing the nation's beef supplies. But one could argue that no matter how misguided the panic selling in August may have been, there may be even less basis for the most recent market losses.

In the days and weeks following the market losses in August due to the plant fire, actual cattle slaughter numbers increased as cattle were diverted to other plants around the country within and outside of Tyson's network. This offset initial fears that packers would be unable to keep pace with the amount of market-ready cattle. And there was no significant shortage of beef available, either in the short or long term. Nevertheless, this did little to support the market until over a month later when a second technically driven sell-off developed and live cattle futures fell $11.45 per cwt. This extremely oversold market structure led to the choppy, but supportive moves seen through the end of 2019.

The fact that similar losses were seen in cattle futures in both these cases is ironic and raises questions about future market support. This most recent move is more focused on outside markets than actual changes in domestic or global beef demand or market fundamentals. The combination of outside market pressure and stock market losses has created a hostile environment that has very little to do with overall beef values or with current consumer demand.

The Dow Jones Industrial Average has fallen over 3,000 points this week, the most aggressive losses seen since late 2018 and pushing the index to a five-month low. There are concerns of widespread commodity losses continuing through the end of the month.

Meanwhile, beef continues to be the highest-priced product in the meat complex, which makes it the most vulnerable to price pressure from consumers. The ideology behind the process (no matter how flawed) is -- because beef is the highest priced -- when consumers cut spending, they will cut out the highest-priced product and substitute it with cheaper products. In the case of meat, that means substituting pork or chicken for beef.

This fear that significant changes will be seen in short-term consumer demand is just as illogical as worries expanding coronavirus cases in Japan, South Korea, Italy and Spain will lead to long-term economic disasters. This current market move lower has been driven more by panic than by fundamental logic, with cattle markets having to pay one of the highest prices of this latest market correction.

There are several deeper fundamental and technical issues also going on in most markets, including in live cattle trade and the stock market. But fears due to coronavirus and mental images of large numbers of people in quarantine have led to a market freefall.

Most likely, six months from now, we will be able to look back on this situation and be amazed at the impact the panic moves had on the livestock complex. But, in the here and now, as markets still have been unable to find any sense of technical or fundamental support, the path seems very dimly lit.

Rick Kment can be reached at rick.kment@dtn.com

(AG/CZ/BE)

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