The Market's Fine Print

In the words of the renowned ag economist Kenny Rogers, cattle marketers need to know when to hold them, know when to fold them, know when to walk away, know when to run.

Unfortunately, this critical lesson of timing often falls on deaf ears, especially given feedlot hearing impaired by a marathon rock concert of profits. I'm afraid winning options have recently evaporated for country speed-walkers and sprinters alike. Indeed, the last safe bus out of Vegas left two weeks ago.

For the week ending Aug. 25, cattle-feeding gamblers lost their first pot since mid-December 2016. It was an extraordinary streak of market luck, both in terms of longevity and profit depth. Beef producers rolled red-hot dice for 35 consecutive weeks, each time gathering chips worth no less than $245 per head (on average).

The nine-week period between early April and mid-June proved to be particularly smoky. According to the DTN feeding model (based on 8-weight steers fed over 120 days), per-head feedlot profits hovered in a record range from $313 to $470, averaging a breathtaking $372.

If any suspected card-counter had ransacked the house like this at Caesars, you can bet some ambassador of hospitality named Guido would have invited him to tour the back alley.

Yet as cattle feeders move into the last third of 2017, physical threats caused by displays of excessive luck are probably the last thing they have to worry about. To the contrary, I think it's likely that beef producers will now see nothing but rather serious red ink (i.e., from cash to cash) through the end of the year.

Roughly halfway through the third quarter, we have crossed a Rubicon separating two cattle market banks that are both very similar and very different. On one hand, the old bullish shore was thick with profit potential for as far as the eye could see. Although commercial beef production advanced at a healthy clip (generally 3% greater than Jan-Jul 2016), impressive growth of domestic and export demand turned out to be more than an effective counterweight.

But what really fenced the first half of the year as the promised land of outstanding feedlot profits was 1) controlled feeder cattle costs (read an extended period of relatively low breakevens), and 2) factors friendly to the promotion and maintenance of current marketings.

Throughout the amazing profit period noted above, feedlot managers held future breakevens within a $10 range (basically $98-$108), successfully resisting the temptation to recklessly plow feeding profits back into runaway replacement costs. Furthermore, they worked diligently to stay as current as possible, helping themselves by reacting to discounted deferred live futures, unusually strong basis levels, excellent at-hand profit opportunities, and attractive feeder-fat swaps.

"Currentness" may be the most important market-moving concept never to be defined by the Wharton School of Business. For those in the livestock world, it's an absolutely critical metric of leverage vis-a-vis a perishable commodity. Given exactly the same fundamentals, the difference between extreme currentness and extreme uncurrentness can translate into a price swing of $5-$10. Maybe more.

All these factors that promoted currentness through the first seven months of 2017 (limiting carcass weights and forcing packers to work harder), now seem to be fading into the rearview mirror.

Specifically, as cattle feeders prepare to march through the tail-end of the year, the challenge of harnessing currentness as a positive market force stands to be significantly more difficult.

Why?

As breakevens rise (curving from $110 to $120 over the next several months) and fed prices continue to fall, faltering profit potential will no doubt slow the incentive to sell ready cattle.

Premium live cattle futures and softening basis levels could further delay feedlot trigger-pulling. Finally, the erosion of the feeder-fat swap (e.g., per-head fed revenue in March was enough to purchase 1.64 7-weight feeder steers; by August, the same swap had declined to 1.37) threatens to discourage the aggressive turnover of investment dollars that clearly serviced the cause of currentness earlier this year.

In short, cattle feeding gamblers mindful of the power of currentness started the year with a winning trifecta (i.e., profits, discounted futures, ongoing investment opportunities) and seem to be ending it with a triple threat (i.e., losses, board premiums and weaker basis levels, less-inspiring placement prospects).

Although Sep-Dec fundamentals stand to be somewhat more challenging in terms of larger total meat production and a slight slowing in export growth, I think the real manageable key to the preservation of feedlot equity will be the successful maintenance of currentness.

But just don't think the cards will come as easily as they once did.

Indeed, the late-year deck may now be stacked against timely fed marketing.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(AG/SK)

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