What a difference a year makes. More to the gist of the cattle-feeding market, what a difference 12 months of generally consistent and sizable profits make.
When January 2017 began, most beef producers pretty much limped into the new year as the walking wounded. The 2016 fed market was absolutely brutal with third-quarter prices imploding nearly $30 for the second consecutive year. About the only thing this vast sea of red ink was good for was the encouragement of thoughtful complaints and critical thinking.
At the top of the bitch list early last year were two related problems, both chronic yet recently intensified: 1) the extreme volatility and cash-market-discount of futures; 2) the slow death of market fed cattle via cash negotiations.
Strangely, I don't hear much griping like this in the early rounds of 2018. Could it be that these stubborn difficulties have finally been solved?
(I'll pause here long enough for the laughter to subside.)
Of course, these troublesome issues remain alive and well, despite several well-meaning but largely ineffective efforts to correct them. Actually, CME officials have been at least paying lip service to industry concerns, tinkering with small changes over the past two years (e.g., cutting trading hours; implementing new rules on order messaging).
But like some global power hopelessly stuck in a Third World quagmire, the CME essentially declared victory last fall over cattle problems and went home. Without presenting any supportive data, these would-be reformers rather lamely referred to "feedback" suggesting the board utility had significantly improved.
While my data and feedback could be considered equally lame, a fairly intense day-to-day market watch tells me cattle futures remain broken, at least in terms of a practical tool for commercial managers.
Just look at the way feedlot sales soared $3 over spot Feb live this week. In whose crazy world would such basis strength seem either normal or predicable?
As far as the endangered species of negotiated marketing is concerned, I see very little evidence to suggest that cash bathwater has stopped circling the drain. While Superior's Fed Cattle Exchange continues on the internet as a noble experiment, receipts seem to get smaller and smaller with each passing week.
Furthermore, USDA just released its annual summary of cattle sales by type, and official stats continue to tell a marketing story of formula dominance and the minimized cash negotiation. Total U.S. fed sales in 2017 fell into the following categories (with 2016 percentages in parentheses): cash - 25.7% (25.6%); formula - 57.2% (57.6%); forward contract - 13% (12.7%); negotiated grid - 4.1% (4.1%).
Some eternal optimists may rush to point out that this represents the second consecutive year the percentage of cash-negotiated business has edged incrementally higher. I think that's a long stretch for just a little cold comfort. Given the fact that the marketing method of cash negotiation has been more than cut in half since 2005 surely makes the big picture quite gloomy.
So if this thorny problem remains very much on the table in the early hours of 2018, why has the trade turned down the volume on discontent and the need for reform? The simple answer involves the substantial equity transfusion of 2017.
The roots and fruit of change always grow better in times of economic adversity. On the other hand, prosperity tends to be the status quo's very best friend. The enemies of reform have received a reprieve in the form of extended feedlot profits.
Yet I don't think these critical problems can be ignored for long. Whenever the next unworkable combination of supply and demand sends risk managers running toward a system that doesn't work, you can bet these tough questions of cash and convergence will be ferociously born anew.
For more from John see www.feelofthemarket.com
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