The U.S. herd is the smallest since 1952. The on feed numbers are the second lowest on record, and the commercial beef output in the U.S. is the lowest since 1994. The USDA says the herd is at a 61-year low as of January 2013. Beef production dropped to a 20-year low. Talk about extremely bullish!
So how did all of this happen?
It appears it started with the 2011 drought in Texas. Cattle were liquidated because pastures burned up. Then, to add insult to injury, the Midwest had the driest spell since the 1930s in 2012. To further put upside pressure on cattle prices, global consumption is increasing (even though U.S. demand is down) and is the highest since 2008 because of standard of living improvements in various third-world countries making beef more affordable. Consequently, year to year exports are up 4.4%. Now Western Australia is experiencing very hot weather – 110 to 115 degrees. Western Australia is the beef producing sector of Australia. That stresses those herds. Does it ever end?
To build herds up again doesn’t happen overnight. According to my sources, normally it takes three years to breed a cow and raise its calf to slaughter weight. And the unusually cold winter we are experiencing is making weight gain difficult. So attempts to end up with the same tonnage seen prior to the low cattle numbers at year end, is difficult at best. And for those pastures damaged by the drought, it takes years for them to come back. How could it possibly get any more bullish?
So where are cattle prices headed technically? Live cattle (CME:LCG14) have confirmed that they are in the process of another major wave up on the monthly chart. They are at new historic highs. Technically more than one measurement suggests this current wave up could reach somewhere between 143.00 and 144.00. Will that happen? Considering the fundamentals, that seems likely.
The difficult part with any market is the timing of a turn, whether up or down. The future’s market historically tends to change trend before the fundamentals. For example, commercial beef output is at its lowest since 1994. But what were cattle doing in 1994? Being a bullish factor, you would think that cattle were making new highs in that year with such low output. Wrong. The futures actually peaked in 1993, a year prior, and went into a major downtrend that finally bottomed in 1996.
I learned this key relationship between fundamentals and the future’s prices rather quickly when I first got in the business. And the cattle market (ironically) was the teacher! Cattle had been in a bear market. A cattle on feed came out and it was extremely bearish. Cattle opened down limit. Before the day’s end they had locked limit up. That was literally the end of the bear move. My point being, at that time the cattle market turned when the fundamentals were at their most bearish and least expected. Likewise, don’t be surprised if the futures turn when cattle fundamentals are at their most bullish and, again, when least expected. As in any market.