HASTINGS, Neb. (DTN) -- Each year, DTN publishes our choices for the top 10 ag news stories of the year. Today we continue our rundown with No. 5, the roller coaster market ride of the U.S. cattle market. Increasing lack of cattle trade transparency and wild predictions of beef demand continued to throw cattle producers to and fro. DTN livestock analyst John Harrington takes us on the ride, and what it may mean for the coming year.
Since topping at history-making heights in November of 2014, the extreme twists and turns of the cattle market have suggested a censored script of "The Road Runner Show," one so steeped in violent volatility and random destructiveness to be banned even by the underworld's sleaziest arcades.
Imagine Wile E. Coyote overrunning the Grand Canyon's highest cliff, plunging hundreds of feet through hungry kettles of vultures, bouncing off multi nests of giant bald eagles, and snout-planting into a major highway moments before a fleet of trucks and buses redefine the sport of roadkill.
Now envision a much darker and more costly round of animation, real-time market slapstick that's stripped the cattle industry of billions in equity. Although the latest frames of this chaotic cartoon actually contain a few notes of optimism (e.g., the five-area steer average has rallied $11.44 since mid-November, $17.55 since mid-October), the 2016 cattle market in general can only be described as the latest chapter in unmanageable volatility and backbreaking losses.
For the third consecutive year, cattle feeders suffered through an unrelenting pattern of wild price swings. The simple fed price average for the year was approximately $120.60 (low to high range: $97.59 to $139.18), 18% below the annual average of 2015 (low to high range: $116.84 to $169.67).
If charted as a bell curve, the standard deviation of 2016 fed prices total a formidable 12.09 units, snugger than the price rodeo of 2015 (i.e., 15.39 units) but more than double the five-year average (i.e., 5.5 units). But consider the intense price swirl in less statistical and more practical terms. Thirteen times out of roughly 52, week-to-week feedlot price change in 2016 amounted to more than $3 per cwt (i.e., 25% of the time). Again, though such volatility haunted 2015 nearly 38% of the time, the longer-term average is closer to 18%.
TWO CANDIDATES FOR BLAME
When it comes to explaining the extreme price swings of 2016, there are at least two leading candidates for blame. The first is ongoing beef demand uncertainty as the market pulls back from the highest (i.e., untested) prices in history.
This fact, coupled with prospects for expanded tonnage pretty much through the end of the decade, has left the cash cattle market very nervous and subject to spasm of second (and third) guessing. The feedlot trade didn't falter 18%, thanks to a mere 4% increase in net beef supplies. Demand worries played a major role in this year's rather frantic round of price discovery.
But another shaking finger needs to be pointed in the direction of the CME where live cattle futures somehow lost the critical art of convergence and basis prediction. When the board increasingly had difficulty reacting to the same fundamentals of underlying cash cattle, speculators increasingly ran roughshod over commercial traders.
Indeed, when it came to wild price swings in 2016, the CME casino made cash traders look like timid pikers.
SCARS OF RED INK
If the cattle market of 2016 is set to be remembered for its extraordinary instability, it will also long carry the scars of red ink and economic turmoil. For example, according DTN's feeding model, the average feedlot experience this year generated a loss of $37 per head (i.e., cash to cash). Such an estimate implies that the feedlot sector is about to exit the year another $900 million lighter in total equity.
Positively, this level of loss seems absolutely victorious compared with the utter devastation of 2015 when the feeding game cost the industry nearly $5 billion. Yet, keep in mind that a great deal of the 2015 disaster was transferred this year by feedlot managers to ranchers as they insisted upon lower feeder cattle costs and more realistic breakevens.
Specifically, the cash feeder index in 2016 is staged to average just under $145, fully 30% below the previous year. Such a brutal downshift in yearling value amounts to more than $460 per head.
John Harrington can be reached at firstname.lastname@example.org
Follow John Harrington on Twitter @feelofthemarket
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