The Market's Fine Print

Imagine registering on the "Jurassic Park" website for the annual online auction of extinct pets and livestock. You're so excited by the chance of finally claiming the tyrannosaurus, triceratops, or pterodactyl of your prehistoric dreams that you mistype your password three times (i.e., pricelessdino51).

By the time you make it past the paywall, the chatroom is seething with the usual highly-moneyed suspects: Disney World, British Museum, Bronx Zoo, Trump Towers, William Morris Enterprise. Sensing another spending orgy in the making, all you can do is refresh the windows on your largest credit lines and practice speed-clicking your mouse.

Suddenly, the first lot flashes across the screen. It's a full-grown brontosaurus, stretching close to 70 feet and weighing the far side of 15 tons. Given such a remarkable specimen, not a caveman on site is surprised when the opening bid starts at $1.8 million. But when the market begins advancing by increments of $500,000, you for one pull in your horns to search the catalog for something marginally less endangered.

On the other hand, if you want something more concrete to jack your blood pressure and take your breath away, just spend a morning or two in this spring's cash cattle market. The bullish persistence and velocity of fed prices almost seems worthy of a fantasy film by Steven Spielberg.

Without sounding too cocky, I pretty much saw the bounty of the first quarter coming. Maybe not in terms of exact prices levels, but certainly in terms of steady market appreciation and excellent feedlot profit potential. In truth, one didn't need to be the Einstein of cattle marketing to knit together the positive implications of limited Sep-Oct placement activity, impressive beef export sales, and the lowest feedlot breakevens posted in the country ledgers in years.

Early 2017 was simply a beautiful feeding profit potential to behold.

Yet by the time the last Brinks truck pulled out of the feedlot parking lot (i.e., after the 5-area steer average had rallied $12-$13 through the quarter), even the most zealous market bulls were beginning to listen for the other shoe to drop. After all, placement activity was increasing. Furthermore, the surge in wholesale beef prices threatened to jeopardize the second quarter margins of retailers and food managers (not to mention the attending featuring plans). Finally, the "Grand Canyon" discounts of deferred live futures seemed to foretell of an ugly market disaster set in the oven with the timer on.

In short, as April flowers began to pop, there were good reasons to conclude that a very fine party had just come to an end with designated drivers ready to wheel their drunken friend home. But all such reasoning has proved completely inadequate in explaining the galloping cash cattle market of the last 30 days.

Between the first of April and high noon Wednesday, the 5-area average steer price rocketed from $127.38 to approximately $146. That's a $19 surge I never saw coming. Frankly, I don't think anyone saw it coming, certainly not on top of a $13 vault through the first quarter.

Looking back, I would suggest at least three factors that helped energize the most dynamic spring market seen this century: 1) extreme board discounts stimulated feedlot marketing over a prolonged period, sharpening country current like a razor and significantly limiting carcass weights as well as total tonnage; 2) aggressive boxed beef demand reflected in large, advanced bookings that stretched over the last eight weeks; and 3)very strong export demand, strong enough to require a 20% increase in weekly shipments through the first third of 2017.

Regarding the latter, it may be tempting for some to credit the spring market explosion to prospects for new biz with China. While meaningful negotiations may be developing under the radar (let's hope), I see little at this time to suggest that such a delicious possibility is truly in play. Unfortunately, the potential for significant volume will be limited for several years even after all formalities receive a green light. For example, we know China will start with age-restricted product that can be verified by some kind of traceability system.

How much longer can the spending spree for cloned dinosaurs and market-ready cattle last? Given the tenacity of the three factors discussed above, I would guess a bit longer. Typically, seasonal beef demand starts to run out of gas within a stone's throw of Memorial Day.

Then again, spring price action this year has been about as "typical" as undervalued woolly mammoth.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(AG)

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