Sort & Cull

The dark side of springtime in the Central Plains is all about thunderstorms, tornadic conditions, and atmospheric volatility. The extreme and violent swings in May/June weather require you to stay on your toes, often within the musty confines of a fortified basement.

Cattle market watchers are painfully aware of a similar type of anxiety at this time of year. But instead of fearing baseball-size hail and devastating wind shear, these guys live in seasonal dread of imploding sales of fed steers and heifers.

According to the traditional script, once the spring's market top has been definitely established, all worries turn to the long vigil of dropping shoes. The June live contract typically leads the bearish watch, digging a large discount to spot cash so not to be surprised when second quarter fundamentals inevitably turn nasty.

Prior to the chaotic action of the last several years, a $10 break from the spring high to the summer low used to be a pretty god rule of thumb. To be sure, we'd witness significant price swings on both sides of this metric. But generally speaking, this worst-case scenario was reliable enough to prevent fitful sleep from devolving into complete insomnia.

Unfortunately, this year's storm watch in the cattle market has been like anticipating another Katrina. Panic became so intense in late April that early summer bears drove the June live contract as low as 114.07, more than $25 below the cash high of mid-March. While doomsday talk has lightened a great deal through the first two weeks in May, the spot contract remains extremely pessimistic about blue sky potential.

Given today's close of 123.42, June refuses to let the weather warning expire, insists that the tornado sirens blare on, and swears the feedlot trade is vulnerable for another $12-14 break in price from current levels.

Why do you suppose the elephant of market expectations has gone so bearishly rogue? In part, I think the explanation involves the gross disconnect between fundamentals and price seen in the first quarter. Despite the fact that per capita beef supplies were no more than 3% larger than Jan-Mar 2015 (i.e., 13.5 lbs versus 13.05 lbs, the 5-area steer average fell 17% short of the previous year ($134.81 versus $162.43).

The real destruction of last night's storm always makes the gathering clouds on the horizon seem all the darker. Of course, common estimates of larger per capita tonnage this quarter (say around 13.9 lbs) don't exactly work like a tonic for nerves.

Only time will tell whether the current board has been commandeered by coffee-drunk worrywarts on one hand or prudent realists on the other. Yet if your churning stomach becomes too annoying, here's a spoiler-alert that might help:

Both weatherman and futures have been known to be wrong.

John A. Harrington can be reached at john.harrington@dtn.com

For more of John's commentary, visit http://feelofthemarket.com/…

(CZ)

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