Cattle Call

August 26, 2017 01:33 PM
Live cattle herds are nearing record levels as other protein production remains high. Will growing domestic and global demand keep pace?

For a little more than 30 years live cattle has traded in a range between $50 and $100 per hundred-weight. At the beginning of the current decade cattle prices rallied from under $100 to more than $170. That rally peaked in late 2014 and cattle entered a bear market that took it back under $100 in late 2016 (see “Cow jumps over the moon” below). Like many other markets that have seen extreme moves during the last 10-20 years, market participants are struggling to determine what price level constitutes normal.

A&A Trading Inc. broker Jim Clarkson says the range for live cattle now will be 100 to 130 In the next couple of years because of higher demand.

“I would say that $90 is a long-term bottom in the cattle market,” says long-term cattle trader Tom Crouch. “I wouldn’t disagree that the trading range is $90 to $130; I think $150 cattle is history. We have too many mother cows in this country, we have too much feed, too much grass, we are going to produce a lot of calves.”

Clarkson points out that the in the first six months of this year both the cattle feeder and beef packer and hog producer and packer have all made money. “Usually cattle producers make money and packers lose money and vice versa,” Clarkson says. “Very rarely have all four of those entities made money for six months in a row. I say it is because of demand. Export demand has picked up and domestic demand has been good. The global economy has picked up as people in China and India are no longer subsistence living; [when that happens] the first thing you buy is meat.”

In June China ended its 14-year ban on U.S. beef creating the possibility of a huge jump in demand. “This provides some bargaining power in NAFTA negotiations but will not help the current situation, as it will take time to approve the facilities and get the logistics together,” says Andy Waldock founder of Commodities and Derivatives Advisors. While the lifting of the ban will lead to greater international demand, most analysts say Chinese demand will not be a major factor for a couple of years.

Bears are Back
Regardless of where analysts expect cattle to move long-term, most say cattle is overpriced in the summer of 2017 and is headed lower.

“The cattle market in August and September is going to [test] $100; I am very bearish,” Crouch says. “We have too many cattle. We’ve got a ton of cattle coming at us in the next 90 days.”

And it is not just cattle. “We’ve got a record number of hogs, we’ve got 30% more chickens; they only thing that can save this market is exports, and I don’t think China will be a factor in the beef market for at least two years,” says Crouch. “China is producing a lot of hogs. Brazil and Australia are producing a lot of beef.”

In addition to the record-high numbers of cattle on feed, we are entering a weak seasonal period and there are signs of oversupply. “We are in the midst of a basis shift, which occurs quite often this time of year,” says R.J. O’Brien, senior vice president at James Brooks. “We are through supplies that we have been waiting for, and in a 3 to 4 week window – the dog days of summer — we’re coming into the weaker slack demand timeframe, which will go on until we get into the Labor Day holiday.”

While Brooks says much of the bear news is priced in, he adds, “The cutouts are probably going to continue to lose value [through July] as we shove product through the system. Cash is trying to stabilize, but might still work lower because of the share numbers. I am not looking for cash to go lower than 110-112.”

The 110 area is tagged as solid support by nearly everyone we spoke with. “It might not get that cheap; we might be close to a cash low now (114). [But] we still have some weakness ahead of us though,” Brooks says.

“We are going to press to $110,” Crouch says. “We are at $120 (on July 1) we are going to be at $110 by (August). Then you are in a range. You are going to set lower low and lower highs in the cash cattle market for the next two years.”

Clarkson adds, “Right now we made a temporary top and we are going to head back down into fall. Through the first half of 2017 the back months have been at a discount. When the back months are at a discount that tells the cattle feeder to sell his cattle as fast as he can. Because it tells them if they hold their cattle they will get less tomorrow then they will get today.”

Both Clarkson and Brooks point out that the discount has narrowed to the smallest level of the year. At one point the basis between cash and futures was well above $10 per hundred weight, but has recently dropped to between $3 and $4. “If this basis gets narrow the cattle feeder will feed them longer. That is what gets you in trouble. If we start feeding too much that is when a low is made,” Clarkson says.

Brooks adds, “The price curve going out to next spring in cattle futures has flattened, which at some point will get the guys to say, ‘We are not going to just sell the cattle at any price to the packer. We are going to feed them a little longer.”

This has already occurred. “For many months we had been racing to sell cattle ahead of schedule, so the weights have fallen below year-ago levels, now they are feeding them a little longer so weights are going back up,” Brooks says.

What About Demand?
There is no question that there is a lot of beef out there. The question is will demand growth — both domestic and international — account for the strong supply?

“We’ve got sufficient supplies ahead of us, but we have been dismissing how good demand has been for this meat,” Brooks says. “We are killing through large numbers and [that] will continue. I don’t want to get too bearish down here at the 110-115 level.”

Brooks adds there has been strong domestic demand and export markets continue to grow despite high production across all meats. “The wholesale pork prices have been high despite having decent supply. We are shipping a lot overseas; chickens the same way. We’ve gradually continue to grow that chicken herd but the prices have been pretty good. When prices come down we have a huge surge in demand.”

Crouch is a bit more skeptical. He doesn’t expect greater domestic demand. “I don’ think the economy for the average American is all that healthy.”

He also sees weakness in retail shopping brought on by the
Amazon (AMZN) effect putting a dent in domestic beef demand. “LongHorn Steakhouse and places like that are in these shopping malls, and the shopping malls don’t have any business. Those places are going to be hurt,” Crouch says. “That is a lot of pressure on demand for beef.”

New World Order
Clarkson says that cattle has become an international market, which may make determining what the new normal will be more difficult. “Cattle just made all-time record open interest of  432,000,” he adds.

Waldock points out that there are more fundamentals to follow. “The cattle market has become increasingly segmented as trade splits into four dialogues. First is NAFTA; Canada and Mexico are our primary agricultural trading partners. These markets continue to be whipsawed as news regarding the agreement is released.

Secondly, JBS (the world’s largest animal protein company) has been forced to come to grips with the error of its ways in Brazil (Brazilian exports have been banned in the United States).

Third, the qualifications for direct beef exports to China will begin to reveal Chinese demand. Finally, the speculative bubble in the domestic cattle market has reached record proportions,” Waldock says. “Mexico’s concern over NAFTA revisions is real and has already begun to manifest itself in the marketplace. Mexico has been searching for other suppliers, even at higher costs, to ensure supplies. This has shown up in declining U.S. exports to Mexico of corn, soybeans and soy meal.”

Brooks adds, “We have a growing export demand for all this meat. It is a growing world population. We’ve opened up China for beef, so that will be picking up in a bigger way. There are a lot of people over there. Long-term I am not really bearish for cattle prices when you get the down to 108-110; that is plenty cheap for beef prices.”

Brooks also says that, “Overall demand has been better than people thought. We’ve underestimated demand and that is why we had that sharp rally late this spring (see “Cattle rebound,” above).”

The live cattle market appears to have moved from a game of checkers to chess. Production is at strong levels, but demand appears game to match it. And there are additional international players to consider, from both the supply and demand side.

Most analysts says growing demand will set a floor at 110 to 100. However, those are historical high levels.

“We basically were never over $1 a pound, until five or six years ago, and now last year it came down to 88-90,” Clarkson says.

While you should be able to get a good price on steaks for your Labor Day barbeque, going out further, there is more uncertainty as cattle is wrestling with new fundamentals and is now playing on an international stage.   

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.