Price Discovery

Market Volatility Ties Up Feeders

Victoria G Myers
By  Victoria G. Myers , Progressive Farmer Senior Editor
DTN Livestock Analyst John Harrington says feeders are in a price environment where the tail is wagging the dog. (DTN/Progressive Farmer photo by Jim Patrico)

A dominant issue for feeders during the past 18 months has been market volatility.

Rabobank's quarterly beef report, released in late June, cited that for the first 22 weeks of 2016, reported prices were higher for 12 weeks, with an average gain of $1.88 per cwt, and were lower for 9 weeks, with an average decline of $3.29 per cwt. One week was unchanged. On an average finished weight of 1,400 pounds, this created a week-to-week uncertainty of $85 to $100 per head.

The group projected a third-quarter average price (western Kansas steer) of $120 per cwt and a fourth-quarter average of $130.

DTN Livestock Analyst John Harrington says the issue of price discovery within the fed-cattle market has been extremely problematic.

"Ideally, markets determine value through an open and transparent consensus-building process, whereby buyers and sellers work to resolve conflicting ideas of supply and demand. You might call this negotiating process 'price discovery'."

Harrington says automating the process with formulas, marketing arrangements and preset triggers activated by a base factor creates an environment where the tail wags the dog.

"Theoretically, there's nothing wrong with using negotiated cattle to price non-negotiated cattle. But what happens when the former sample becomes much, much smaller than the latter?" he asks. "Unfortunately, we seem to be moving toward that awkward state when the questionable integrity of price discovery fuels serious market problems ranging from volatility to unpredictable basis levels."

Coupled with this difficulty, Harrington says during the last 18 months, "feedlot and stocker losses have been absolutely staggering." Equity problems are becoming common.

"In short, both bankers and prudent managers will demand much sharper pencils going forward," he says.

Ultimately, Harrington says he has a hard time seeing 550-pound steers this fall bringing much outside of the $150 to $160 range, and market pressures could push that level lower in the wake of a short corn crop.


Victoria Myers