The Market's Fine Print

2015: Should We Have Seen You Coming?

John Harrington
By  John Harrington , DTN Livestock Analyst
Even a high powered telescope couldn't have helped cattlemen foresee what 2015 had in store. (Photo by imaginedhorizons; CC BY-SA 2.0)

If calendar year 2015 was planning on a tearful farewell, the cattle industry's annus horribilis best think again. Speaking for the vast majority of feedlot managers and ranchers, permit me to out the matter succinctly:

"Don't let the door hit your butt on the way out."

Yet as eager as I am to bury the unprofitable past, there is an eleventh hour tug to look back over this fitful marketing year and wonder what could have been done differently. Exactly where were the golden opportunities lost? What glaring signs of price danger did I heedlessly ignore?

No, such a painful retrospective won't add a penny to overdrawn bank accounts. Furthermore, should-have-dones can be savage on the old self-esteem as they underscore our sad inability to see what we don't want to see.

I guess I'm just betting on that outside chance of learning from the past. Maybe I'm just the type that can't stop picking at scabs. At any rate, let's take one last stumble down memory lane and puzzle over critical market roads not taken.

2015's first serious market test for feedlot managers surfaced as early as mid-January. That's when the 5-steer average hit $169.67, the high water mark for the entire year. Knowing what we know now, how the cash market was to eventually implode by more than $50, every head at the bunk line should have been counted twice and hedged with both hands.

For what it's worth, headline news hardly encouraged a great deal of confidence, ranging from terrorists attacking the French magazine Charlie Hebdo to the U.S. dollar hitting a 11-year high to rumors of Mitt Romney willing to take another run at the White House.

But I suppose traders remained calm given the fact that prices were still within friendly spitting distance of the all-time high set just two months before (i.e., $171.38). Indeed, why muzzle your dog when he's still full of fight and breakevens are on the aggressive rise?

The next moment of pricing truth came in early April when the fed cattle trade notched its second quarter high of $167.67. Again, hindsight instructed that this would have been a great time to launch an aggressive program of damage control. Contrary to seasonal odds, packer spending peaked and cookout demand fizzled.

It didn't make much sense at the time, but neither did McDonald's boosting salaries by 10%, Hillary opening her first campaign office in Brooklyn, and Wisconsin beating Kentucky. Some may have seen these outside tea leaves as generally bearish, but most of us failed to detect a meaningful pattern.

For cattle feeders, the last chance watering hole was reached in mid-August. As the cash market rallied from the lows of July to $151.13, President Obama reopened the U.S. embassy in Havana, Donald Trump announced plans to block immigrants with a massive wall, and China aggressively slashed the value of the yuan.

Hoping that the worst was over and market prices would now enjoy at least moderate seasonal strength over the last third of 2015 (historically, firming feedlot sales from midsummer through the fourth quarter is about as reliable as things get), risk managers allowed the opportunity umpire to call "strike three."

Big, big mistake.

The unwinding of the 2015 feeder cattle market is both similar and different. But while missed marketing opportunities of ranchers can also be partially excused by extended period of profit and bloated confidence, I don't find their record to be quite as forgiving.

As in the case of fat cattle, feeders scored the highest average price of 2015 in early January (i.e., $235.16 basis the CME cash index). At that time, there was absolutely no reason for country sellers to flinch. Indeed, between huge feedlot profits stockpiled in 2014 and widespread plans of heifer retention (i.e., tightening immediate feedlot replacement supplies even more), cow-calf producers were fully entitled to be downright frothy.

However, six months into the troublesome year, ranchers needed to be reaching for their kerchiefs.

In late June, headlines were dominated by the Charlotte churching shooting, the Senate giving fast-track TPP authority to Obama, and the launching of Bobby Jindal's sorry run for the White House. In all probability, it also marked the last meaningful rally in this production cycle for feed cattle prices (i.e., topping at $231).

I love to party with the best of them. But if you're still drinking an hour before church on Sunday morning, you may have a problem.

While calf and yearling prices stayed quite strong through the first half of 2015, there were plenty of reasons for ranchers to start sobering up as feedlot red ink rose higher and higher. It may not be reasonable to expect more clairvoyance from ranch managers than their feedlot counterparts relative to the utter collapse in market psychology seen in the third and fourth quarters. Yet profit protection should have more of a hair trigger than damage control.

Curse 2015 all you want. But carefully reviewing the game films reveals one basic truth: Ranchers were given plenty of opportunities to bank another year of fantastic profits. Cattle feeders scarcely had a fight chance.

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John Harrington