The Market's Fine Print

Hitting the Brick Wall

John Harrington
By  John Harrington , DTN Livestock Analyst
It's as if the cattle market has run into a brick wall, where it remains stuck and bloodied, according to DTN Livestock Analyst John Harrington. (DTN photo illustration by Nick Scalise; brick wall by David Hilowitz, CC BY 2.0)

Brick walls tend to be unforgiving, especially in the face of speeding markets suddenly deprived of either accelerator or brakes. Visualize such a devastating collision and know the horrible cattle trade of the expiring third quarter of 2015.

As torn bodies are carried in and out of the emergency room, crash victims can be heard groaning the same questions: What hit me? Where did that come from? Why were no warning signs posted?

Before I go further in describing this tragic pileup, let's head the "told you so" crowd off at the pass. You know, that sympathetic but smug bunch so quick to ask about safety belts, speed limits and blood alcohol levels. And when they say things like "that road should never be traveled at night," they really mean "anyone who enters the cattle demolition derby is crazy for not wearing a fire suit to begin with."

Such glibness must be disabused by recognizing the extreme size of the market's ongoing debacle. Indeed, as I write, dressed steers and heifers in Nebraska and Iowa are selling for no more than $203, $9 lower than last week, $35 lower than early August, off $62-$63 from the early spring high, and $43 south of late-summer trade of 2014.

Since Labor Day, October live and feeder futures have imploded by 1,025 and 1,715 points, respectively. Over the same period, the choice beef cut-out has collapsed by no less than $20. Even the drop credit has slumped nearly 15 cents through the current month.

The worst part of these nauseating stats is their provisional nature. There's virtually nothing on the table to suggest a reliable market bottom is close at hand. And it's exactly the destructive potential still locked and loaded that qualifies the late-summer/early fall cattle market as the most ruinous period seen since the first half of 2004 when the shockwave of BSE violently ripped country equity.

While I have no sick desire to relive those chaotic days of mad cow madness, at least everyone agreed upon the smoking gun. Conversely, the monster bear market now at hand seems as parentless as pet rocks or Jim Gilmore's decision to run for the presidency. There may be a few desperate theories in that regard (see below). But at this point, Bernie Sanders and Ted Cruz would probably have a better shot at consensus building.

Rounding up the two usual suspects capable of dramatically moving markets, demand looks guiltier to me than supply. Though having said that, I have trouble understanding why beef buying suddenly dropped to its knees after performing quite well through the first seven months of the year.

Understandably, 2015 began with a good deal of beef demand worry. Talk of "sticker-shock" fell easy from the lips of both speculators and commercials, especially as they imagined the specter of cheapening cuts of pork and chicken tied to expanding bases of respective production. Yet, despite this nail biting, beef prices on both wholesale and retail levels held up remarkably well through the first two quarters of the year, reflecting enough hardcore strength for consumer resistance to drop off many radars.

But maybe demand erosion was simply late in developing. Did the beef-friendly, but long-stressed, family budget reluctantly cry "uncle," worn down by attractively priced cuts of pork and chicken? Comparative shoppers may have been seriously sobered by the following average retail prices for August: sliced bacon, off 14%; all pork chops, off 5%; boneless hams, off 6%; fresh whole chicken, off 3%; boneless chicken breast, off 2%; frozen whole turkey, off 4%; ground chuck, up 8%; ground beef, up 7%; all beef roasts, up 8%; and choice sirloin steak, up 11%.

Further wagging its finger at demand, weekly beef exports since early August have really fallen out of bed, consistently trailing the shipment levels of 2014 and the three-year average by generally 20%-30%. The one-two punch of historically high prices and the strong dollar seems to be taxing foreign beef buyers as well.

Given all the talk about record carcass weight and discounted big cattle, some will no doubt be more inclined to explain this market collapse in terms of unwieldy supply. But while it would be foolish to dismiss supply as a contributing factor, I just don't find it very helpful in explaining the ridiculous size of this mess.

Between July 4 and Labor Day, weekly beef production consistently totaled 3%-4% below the comparable tonnage of 2014. Granted, beef supplies through much of September have averaged close to 2%-3% above last year. Ballooning carcass weights have made some difference with mid-month steers averaging 914 pounds, an all-time record.

Packers have become vigilante weight-watchers these days, aggressively discounting carcasses weighing over 1,050 pounds by $10 or more. They're pulling out scolding rhetoric not employed in years, stuff like "it won't fit in the box" and "chain-slowing heft." Many market watchers don't remember that government inspectors stopped yield-grading altogether in early 2009 for want of traffic. To the extent fat has been measured in recent years, the standard have been based on house specs and brands, not any consistent measures imposed by the USDA.

Maybe processors are totally justified in taking current weight docks. My gut feeling is that they discounted primarily because (thanks to bleak market psychology) they can.

But whether you blame supply more than demand, demand more than supply, or castigate them with equal vigor, your package will seem grossly disproportionate to the mountain of market damage still growing. In short, I think the cattle market has gone beyond that scary point where fundamentals just don't matter.

Once in a while, markets just get broken. About all we can do is wait for the resulting money games to play out and reopen a new stage for reasonable analysis. That's anything but a warm fuzzy. I guess that's why they call it a brick wall.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

(AG/ES)

John Harrington