The Market's Fine Print

Beware the Third-Quarter Swoon?

Is the fed cattle market in for another third-quarter swoon this year? It might be wise to keep a fainting couch on hand just in case, says DTN Livestock Analyst John Harrington. ("Young Woman Reclining in Spanish Costume," 1863, by Edouard Manet)

Fool me once, shame on you. Fool me twice, shame on me. Fool me three times, shame on the new market trend?

Forewarned is forearmed, right?

An ounce of prevention is worth a pound of cure, don't you think?

Once burned, twice shy, give or take a few blisters?

Oh, for the love of clarity, let's just park the cautionary bromides.

Somehow I think the bitter pill in hand is unlikely to slide down your gullet with ease regardless how it's disguised as a tasty morsel.

Better to cut to the spoiler alert and let the sour stomachs churn where they may. So here goes.

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Drunk with feeding profits and late-spring cash leverage, the market party animals wildly flinging around the cattle dance floor at this time are not going to like the sober tone of this column. Not one bit. Indeed, the following comments will no doubt be seen by some as the party-pooping equivalent of police responding to angry neighbors or the yawning host flickering lights and closing the open bar.

Believe me, it's not a role I enjoying playing. Nobody likes a good time more than yours truly. Furthermore, I'm not even all that confident about the depressing cattle price prediction in tow. In fact, please think of it more like a very dangerous possibility. The mere chance of recent third-quarter market history randomly repeating itself simply strikes me as much more troubling than the negative implications of fundamentals currently on the ground. Otherwise, I wouldn't dream of slopping a wet blanket around the ongoing bullish bash.

Those of you still carrying scars from the bizarre third-quarter markets of 2015 and 2016 may want to avert your eyes and/or secure the nearest airsick bag as I remind the more forgetful in the room what price implosion really looks like. For background, keep in mind that prior to the surfacing of these mysterious outliers, the long-term trend called for fed prices to rally from midsummer through early fall by generally $3-$6.

First of all, the third-quarter crash of 2015 came in the wake of record packer spending earlier in the year (e.g., the 5-area steer average notched an all-time high of $167.57 in early April). To no one's great surprise, this red-hot market slid seasonally lower through much of the second quarter. But just when the market appeared to be stabilizing somewhat under $150 near mid-July, feedlot prices suddenly fell into a deep and shocking swoon. Between early August and the start of the fourth quarter, dumbfounded market watchers and beef producers helplessly witnessed a price plunge of more than $30.

When it came time for year-end assessments several months later, still-confused analysts had to rely more on philosophy than data to explain the third-quarter collapse. Much of the forced reasoning went something like this: "Extreme highs often lead to extreme lows, especially given signs of a significant shift in the production cycle; such a seasonal anomaly as just seen in the Jul-Sep period would not likely surface again for a long, long time."

It wasn't a bad spin, at least for the next six months.

While fed price levels through the first half of 2016 were substantially lower than the previous year, the market's high/low timing mirrored 2015 quite closely. The 5-area steer average topped at $139.18 around mid-March. The cash trade then seasonally eroded over the next four months or so, momentarily stabilizing a bit under $120. But before you could say "never again," the market sank into yet another third-quarter tailspin with feedlot sales sinking from $118.92 in early August to $97.59 in mid-October.

Another round of analytical woolgathering necessarily developed in late 2016, but the rhetorical fleece did little to hide red faces pretending to explain extreme third-quarter price action. Awkwardly similar to the year before, the imploding Jul-Sep cash market seemed largely discounted to trends in exports, imports, domestic production, retail pricing, and macroeconomics.

So, do either of these historical oddities justify breaking up a perfectly good party in the late spring of 2017? Frankly, I have no idea. Big feedlots do seem to have plenty of cattle scheduled to finish in late summer. Yet beef demand continues to perform like a champion, cutting through tonnage like a buzz saw.

But here's the point: No one saw the third-quarter swoons of 2015 and 2016 coming. Seasonal fainting couches had been long ago hauled to the attic along with spinning wheels and spittoons. As unreasonable as those breaking markets seemed, the staggering size of the price swings alone means that I must take the possibility of a reoccurrence seriously.

Still not worried? Perhaps your confidence is fully justified. Good enough. But before you go refill your big solo cup one more time, just remember that every last head now lowered at the bunk line is very hedgeable. Does it make any sense to bank at least a few against even the remote possibility of another third-quarter swoon?

If that sounds completely crazy, it may be time to find the designated driver.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(AG)

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