Experienced probate attorneys have been known to say that the only real difference between a large cattle estate and a small one is which market year the deceased decides to move on to greener pastures. For those missing either legal fees or a live pulse, the cattle feeding market of 2015 proved to be a huge disappointment.
Yet beef producers still in the land of the living can tell an even darker tale, one of imploding fed cattle prices and staggering equity losses. According to the DTN feeding model, finished steers and heifers in 2015 suffered an average loss of $202 per head. Assuming annual fed slaughter of approximately 23 million head, the tidal wave of red ink totaled $4.65 billion for just the feedlot sector alone.
Indeed, the ugliest market in moderate times actually succeeded in obliterating the record profits of 2014 when roughly 24.2 million head of feedlot cattle returned $3.5 billion (i.e., $145 per head). It can be argued that the seeds of financial ruin were planted in the rich soil of last year's amazing success. But before examining this telling logic, let's first identify the most obvious potholes in the 2015 highway.
Generally speaking, fed cattle price potential in 2015 was significantly checked by three realities: 1) Greater total meat production; 2) Weaker domestic beef demand; and 3) Significant growth in beef's deficit trade balance (i.e., net imports).
Although total cattle slaughter this year was somewhat shortened by the last of the smaller calf crops, increased heifer retention, and a reduced cow kill, heavy carcasses meant the commercial beef production was only 1%-2% smaller than 2014 when everything was said and done. But this small shortfall was more than offset by substantial increases in both pork (up 7%) and broiler (up 4%) production.
Additionally, wholesale and retail beef movement in 2015 (especially the second half of the year) was finally afflicted by a bad case of "sticker shock." While consumer resistance had long been feared in the face of record meat counter prices and a spongy economic recovery, product movement somehow just managed to stay "good enough" (no doubt helped in 2014 by soaring pork prices tied to the PEDv crisis) until the middle of the third quarter. Poor movement suddenly caused grocers and food managers to insist on bigger margins through sharply lower farm share of the retail dollar.
Finally, cattle and beef prices were hammered this year by the unhappy combination of falling exports (off 14%) and rising imports (up 16%). The strengthening U.S. dollar played in big role in this regard, making U.S. beef more expensive for foreign buyers and U.S. prices more attractive for foreign sellers. Another negative wildcard in foreign trade was connected to our outbreak of avian flu. As some global buyers reacted by closing gates to U.S. chicken, beef was forced to compete with even more white meat redirected to the domestic market.
All of these factors worked to rob cattle and beef markets from previously presumed potential. By the time the last pot is unloaded and paid for in 2015, we project that the annual 5-area steer will average $145.50, down from $151.20 in 2014.
But while such an unflattering price comparison is hardly a pretty picture, how was it possible that a mere shortfall of 4% resulted in billions and billions of economic destruction throughout the cattle industry?
In a word: ruinous expectations.
With the magic whirl of a money-making machine in tow, cattle feeders stepped into the dawn of 2015 with a sense of invincibility, a marketing confidence built by record profits and dialed into the highest breakevens ever to be cast upon the water. With surplus capital to burn and feeder supplies further tightened by bred heifer speculation, feedlot managers were set to become their own worst enemy.
Specifically, the average breakeven for 8-weight feeder steers delivered to the bunk in 2015 was $165, nearly 16% greater than 2014. And since both the cost of corn (off 40 cents plus per bushel) and hay (off $26 plus per chopped ton) averaged well below the previous year, the impossibly tall bar of breakeven was essentially a function of feeder cattle spending.
Exactly how much were bullish cattle feeder loaded for bear last January? Consider this scary metric. In the last six months of 2014, the CME cash feeder index averaged $230.15, a whopping 45% greater the July-December 2013.
So even if the 2015 fed market had been free of all the speed bumps discussed above, it wouldn't have been good enough -- not by half.
For more from John see www.feelofthemarket.com
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