Fed Market Erases All of 2014 Gains

By Cassie Fish, CassandraFish.com

http://www.thebeefread.com/

In less than one year, cash fed cattle and now CME live cattle futures have retreated to 2013 levels. In a remarkable and mind-bending turn of events, 2015 is breaking just as many records as 2014- only in reverse.

Seasonals and supply fundamentals have been tossed out the window as September draws nearer to a close and the hope of a “normal” fourth quarter rally becomes suspect.

Not since 1981 has a “fall bear” gripped the cattle industry. That year too was plagued by overweight cattle and big discounts on Y4s and Y5s. It was the only year in the last 35 when the down continued until the Dec LC expiration. That bear market followed the all-time high of the most famous bull market in cattle market history that topped in October 1979. By the time the Dec LC low was made in 1981, 55% of the big rally had been erased.

         One Black Swan Followed by Another

But in our times, things unfold much more quickly. The “Black Swan” of 2014 has been followed by another “Black Swan” in 2015. It was inconceivable not too many months ago that record small domestic beef production would coincide with a collapse in fed cattle prices from near $170 to $130 in 9 months.

Electronic trading, managed funds, captive supplies, a strong U.S. dollar fueling enormous imports muted exports are all factors contributing to what has occurred. A much more astute packing industry, willing to curtail kills seemingly indefinitely thanks to a purge in fed capacity over the past 10 years, was certainly one of the biggest game-changing dynamics. Throw in a feeding industry that increased its days on feed and slowed its turnover rate and the ultimate combination of all of the above overrode the bullish supply fundamentals like a ton of bricks. Currentness or lack thereof, ultimately still matters.

Humans are hard-wired to look back to help figure out the future. But hind sight isn’t really all that helpful when in the middle of a wreck such as this for the U.S. cattle industry.

Cash feeder cattle now stand out as grossly overpriced. The last time LC cash and futures were this cheap, feeders were in the upper $168-170. Jan and March FC futures are getting close to that level but the index is propping up the front end.

In fats, half-way back from the December 2009 bottom to the October 2014 top on the spot LC chart is $125.32. That happens to coincide with where cash cattle prices were about a year ago. As Oct LC closes in on limit down today and cash cattle are reported trading at $130-131, that no longer seems out of the question.