Sort & Cull

Remember when First Lady Nancy Reagan led the war against drugs with the righteous-sounding but rather feckless cry, "Just say no"?

I'm sure her heart was in the right place, but such cheerleading might have been a bit outmatched by the tough realities of physical addiction and the greed of organized crime.

Yet 30 years later I wonder if black-and-blue cattle feeders are now finally responding to a similar plea for life-saving behavior. Only the drug of choice has changed.

Instead of meth and cocaine, we're talking hopelessly expensive calves and yearlings. And while the jury remains out regarding dependable signs of a "cure," significant shifts within feeder-fat spreads tell me something different in happening.

First consider the basic fact that the feeder market has fallen out of bed since early January, defying in the process a rather strong seasonal trend of rising prices. Since topping over 150 soon after the first of the year, the cash feeder index has now toppled more than $12.

Such a significant price implosion would be classically explained in one of four ways: 1) a substantial increase in feeder cattle offerings; 2) a sharp rally in the cost of corn; 3) an ugly crash in deferred live cattle futures; or 4) some combination of these factors.

The first possibly can be dismissed with a chuckle, and the second simply contradicts real market news. Although the corn market shows tentative signs this week of stabilizing, feed prices have so far spent most of the first quarter on the defensive.

For example, between Jan. 16 and Feb. 25, May and July corn futures collapsed by 46 and 50 cents, respectively.

Feeder and feed prices falling like a rock at the same time is about as counterintuitive as expecting lower unemployment in the wake of sequestration.

That's leaves the third possible explanation of a major reversal in hedgable fed-cattle opportunities. In fact, spring and summer live cattle futures have cratered $6-7 from the highs of January.

While it lacks proportionality vis-à-vis the tremendous drop in input costs, this at least represents some trail of market logic.

I think this strange shift toward more workable feedlot margins probably stems from the serious equity drain suffered by the feeding sector over the last two years.

Between April 2011 through the present, with only a brief reprieve in late 2011, feeding companies have been living with crippling, triple-digit losses (i.e., cash-to-cash). That's an incredible sorry scorecard for a determined but frustrated team chasing record small replacement numbers with record high feed cost.

Cattle feeders are simply sick of losing money, and it would appear they're trying to command a new and much needed discipline. My guess is more than a few have been "encouraged" to do exactly that by their financial partners.

Just say no. Once upon a time, that was a mantra bankers had down pat.

John A. Harrington can be reached at john.harrington@telventdtn.com

(AG)

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