The bearish USDA Cattle on Feed report released last week sparked some interesting conversation and debate, as well as aggressive market losses during the first part of the week.
Pre-report estimates predicted a generally stable cattle on feed level, while placements were expected to be moderately higher. The fact that both numbers were well above a year ago on a percentage basis resulted in market uncertainty. This led me to consider the tried-and-true metric that is used in this and many other reports: the percent change from one year earlier.
Granted, in a situation where seasonal trends continue to be significant and all things are equal, this measurement typically is a very good indicator of market strength, especially on a long-term basis. The chart accompanying this blog tracks total cattle on feed (black line) with percent change from last year (blue line). As you can see, data from 2013 to 2018 seem to track relatively well. This is because, in general, there have been very few disruptions in seasonal trends from one year to the next during these time periods, and the percent-change metric gives a simple indication of what is going on with fed cattle inventories. But over the past two years, things have changed, which have disrupted placement schedules, packer schedules and have led to overall market instability.
In order for the percent-change metric to accurately represent the market situation, it is important to understand and remember market conditions the previous year, and in many cases, the year before that. Typically, cattle on feed numbers hit seasonal lows during August. This happened in 2016, 2017 and 2019. Cattle inventory levels hit seasonal lows in July of 2018, breaking the seasonal pattern and adding volatility to measurement metrics for the past two years. Given the volatility in the cattle industry -- first due to the Tyson plant fire last fall and then the COVID-19 plant restrictions during early 2020 -- the cattle on feed numbers broke away from seasonal patterns, moving significantly lower in March and April.
These events have had a significant impact on current market moves. And moving through the remainder of 2020 and well into 2021, the go-to metric for measuring cattle on feed numbers (percent change from a year ago) will continue to be "wonky," for lack of a better technical term. Typically, cattle on feed numbers post seasonal highs April 1. But in 2020, it appears that yearly cattle inventory lows may be set during April. This would indicate a complete counter-seasonal trend in cattle inventory. But it will take more than a year to work through this change in market patterns. This will likely leave charts and monthly reports looking extremely disjointed -- and less reliable -- especially when focusing on one specific number.
Typical benchmarks such as "percent change" are still good to focus on and, in general, give a good indication of where the market is compared to a year ago. But this metric never tells the entire story, especially when market conditions are far from normal -- as they have been the past two years. It is essential to remember what was going on last year at this same time and take market changes into account.
Rick Kment can be reached at email@example.com
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